Flexible Spending Accounts

Chapter 1: Section 9

Flexible spending accounts, or FSAs, are employer-established benefit plans that reimburse employees for specified expenses. They are funded through salary reduction arrangements under which employees receive less take-home pay in exchange for tax-advantaged contributions to their accounts.

Most federal employees are eligible to enroll in the FSAFEDS program of health care and dependent care FSAs, administered under contract with the Office of Personnel Management by ADP Benefit Services KY, Inc. The Judicial Branch, the U.S. Postal Service and certain financial regulatory agencies operate separate programs whose terms largely parallel those of FSAFEDS.

All employees with qualified dependents may elect to enroll in a dependent care FSA except temporary employees with no fixed work schedule (“when actually employed” employees) whose tour of duty is six months or less. Annuitants are not eligible.

Employees whose appointment conveys eligibility for Federal Employees Health Benefits program coverage generally may elect to enroll in a health care FSA. One exception is that temporary employees are eligible for health care FSAs only after completing one continuous year of service; there is no such restriction on dependent care FSAs.

Participation in both, either or neither type of account is voluntary. Participation, or lack of it, in any other voluntary government benefit program does not affect participation in FSAs except that employees enrolled in a Federal Employees Health Benefits program plan with a health savings account (see Chapter 2, Section 1) are not eligible for health care FSAs unless they are in “limited” accounts as described below under Health Care Accounts.

A calculator to assist in estimating the FSA contributions and potential annual tax savings, based on individual situations, is at https://www.fsafeds.com/fsafeds/fsa_calculator.asp.

Federal agencies absorb the fees ADP charges to operate accounts.

Elections

Open seasons are conducted concurrent with the annual FEHB open season each autumn, with employee elections effective on a calendar year basis. Enrollment is available through (877) 372-3337, TTY (800) 952-0450, or at www.fsafeds.com. A newly hired employee eligible for FSAFEDS has 60 days from the date of hiring, or until October 1, whichever is earlier, of any plan year to make an election to participate in either of the types of accounts, with the election effective upon its receipt by FSAFEDS. Those hired on or after October 1 are ineligible to participate in that plan year, but can elect an FSA during the open season held that fall for the following plan year.

Belated enrollments are considered on a case-by-case basis from those unable to enroll due to circumstances beyond their control.

Employees must re-enroll each year—enrollment is not carried over from one year to the next—and must elect annually each year how much to put into their accounts. There is no employer contribution.

The maximum annual contribution to a dependent care FSA is $5,000 a year ($2,500 if married but filing separately). The maximum annual contribution to a health care FSA is $2,550 a year. If an employee has another health care FSA available through a spouse’s employment, the combined health care FSA allotments to the two accounts may exceed $2,550. Combined amounts for dependent care FSAs may not exceed $5,000. The minimum amount for each type of account is $100 per plan year. ADP translates the annual elected amounts into pay date allotments and arranges with agency payroll offices to deduct them and remit them for deposit into the employees’ FSA accounts.

Employees must re-enroll each year—enrollment is not carried over from one year to the next—and must elect annually each year how much to put into their accounts. There is no employer contribution.

The maximum annual contribution to a dependent care FSA is $5,000 a year ($2,500 if married but filing separately). The maximum annual contribution to a health care FSA is $2,500 a year (effective in 2013; previously $5,000). If an employee has another health care FSA available through a spouse’s employment, the combined health care FSA allotments to the two accounts may exceed $2,500. Combined amounts for dependent care FSAs may not exceed $5,000. The minimum amount for each type of account is $250 per plan year. ADP Benefit Services KY translates the annual elected amounts into pay date allotments and arranges with agency payroll offices to deduct them and remit them for deposit into the employees’ FSA accounts.

Erroneous Elections—If an employee enrolls in one type of account meaning to enroll in the other, under IRS rules those elections can be corrected via account funds transfer if there is “clear and convincing evidence” that the election was indeed mistaken. Employees discovering such an error should contact ADP at the contact points listed at the end of this section (in some cases ADP discovers the error and informs the enrollee). 
However, if an employee and his or her spouse both electing a dependent care account with combined elections exceeding the tax law maximum of $5,100 per family, it does not qualify as a mistaken election. In such cases, the couple may receive reimbursement up to the full election of each person and then resolve the withholding error when they file their federal tax return for that year.

Changing Elections—In general, elections for a year cannot be changed except when a “qualifying life event” occurs. These include:

• a change in legal marital status, for example due to marriage, divorce, death of a spouse, legal separation, or annulment;
• a change in number of eligible dependents, for example due to birth or adoption of a child, death of a dependent, or a dependent child turns age 13;
• a change in employment status (for employee, spouse or dependent) that affects your eligibility for benefits;
• entering leave without pay status to perform military service;
• a change in cost or coverage, such as a significant increase charged by your current day care provider, or a change in your provider (applies to dependent care accounts only); and
• a change in the number of tax dependents you have (for example, a parent now living with you).

A period of leave without pay (including a furlough) is not considered a qualified status change unless it is due to military deployment. See Leave Without Pay in Chapter 5, Section 4 for considerations regarding unpaid leave.

ADP determines whether events qualify for changes in FSAs. An enrollment or change of elections due to a qualifying life event must be consistent with the event—for example, increasing a dependent care account on the birth of a child. A change due to the birth or adoption of a child is retroactive to the pertinent date.

You are not permitted to reduce the election to a point where the total allotment for the plan year is less than the amount already reimbursed or on deposit in your account for the plan year.

Only decreases in elections are allowed after September 30 of any year.

Enrollees wishing to make a change due to a change in status must notify ADP between 31 days prior to the event and 60 days afterward by completing a Qualifying Life Event form available at www.fsafeds.com/forms/qscform.pdf or by calling (877) 372-3337, TTY (800) 952-0450.

How Accounts Work

Contributions are not subject to either income or employment taxes. Participation in FSAs reduces the taxable wage base for calculation of Social Security benefits although not for civil service retirement benefits. However, in most cases the reductions are relatively minor compared with the tax savings to the individual.

Money put in FSAs is available on a “use or lose” basis except that: for dependent care accounts there is a 2 1⁄2 month “grace period” into the following calendar year for eligible costs to be charged against a plan year; and for health care accounts (including “limited expense” accounts) up to $500 can be carried to the following year, so long as the individual has a health care account in that year. (Note: The health care account carryover policy took effect with the 2015 plan year, with the first carryover allowed into 2016. Health care accounts followed the grace period policy through the 2014 plan year into early 2015.)

However, the entire amount in health care accounts is available from the start of a plan year, regardless of how much the employee has yet put in through payroll withholding. Thus, a participant could use up the entire amount available in the account and leave employment with no obligation to pay back the difference between what was paid in and what was drawn out in that plan year.

Money in a dependent care account is available on an accrual basis. Claims cannot exceed what the employee has contributed to that account in the plan year at the date of the claim submission.

Note: “Legally married” employees in same-sex marriages, meaning marriages performed in a jurisdiction (including in a foreign country) that recognizes such marriages. regardless of current place of residence, may submit claims for qualifying health care account expenses for those spouses; children of those couples are treated the same as children of married opposite-sex couples. See Benefits Administration Letter 13-203 at www.opm.gov/retirement-services/publications-forms/benefits-administration-letters. Common law marriages in which the spouses are legal spouses for tax purposes also may qualify.

Dependent Care Accounts

For dependent care expenses, money is typically drawn out from an FSA on a regular basis as costs are incurred, such as through monthly tuition charged by day care programs. Eligible costs are those incurred on behalf of a dependent listed on the participant’s tax return that allow the enrollee and a spouse to work, look for work, or attend school full-time. Eligible dependents include:

• dependent children (including adopted or foster children) under age 13; and
• a person of any age whom you claim as a dependent on your federal income tax return and who is mentally or physically incapable of caring for himself or herself.

An adult (for example, parent, grandparent, adult disabled child) may qualify as a dependent if the employee is providing more than half of that person’s maintenance for the year.

The expenses must be paid to a provider—including a day care center, at-home provider, after school program, adult day care or similar providers—that pays federal income taxes on the income they receive for providing the care. The participant must show the provider’s tax identification number. In addition, up-front fees paid to obtain care through employing a dependent care provider, such as an au pair, also are reimbursable, proportionately over the duration of the employment agreement.

Federal employees receiving subsidized child care through their agencies (see Child Care in Chapter 8, Section 4) must deduct the amount of the subsidy from the maximum amount they are eligible to set aside as a dependent care FSA. Thus, an individual getting a $2,000 annual child care subsidy would be eligible only for a $3,000 dependent care FSA.

See www.fsafeds.com/fsafeds/eligibleexpenses.asp for a listing of eligible expenses.

Health Care Accounts

For health care accounts, money is typically withdrawn on a sporadic basis as costs are incurred on behalf of the enrollee or eligible family members. In general, allowable reimbursable costs mirror costs that can be deducted on an individual’s federal tax return when they exceed 7.5 percent of adjusted gross income in a year. These expenses are described in IRS Publication 502, Medical and Dental Expenses. One exception is that while premiums for long-term care insurance are deductible above that threshold, they cannot be paid from pretax FSA accounts.

Reimbursable expenses are those that are:

• tax-deductible;
• related to the diagnosis, treatment or cure of a medical condition, mitigation or prevention of disease that affects any part or function of the body;
• primarily to alleviate or prevent a physical or mental defect or illness;
• not reimbursed by FEHB or any other source; and
• incurred by the enrollee, spouse and/or any eligible child.

An employee enrolled in FSAFEDS may request reimbursement for eligible health care expenses incurred by a natural child, stepchild, adopted child, eligible foster child, or a child who is placed with the employee for legal adoption. The child does not need to reside with the employee or qualify as the employee’s tax dependent. Expenses of an employee’s child are covered through the taxable year prior to the taxable year in which the child turns age 27.

Allowable costs include out-of-pocket charges under FEHB such as co-payments and deductibles, certain medical procedures not covered or only partly covered by FEHB, and certain other health-related expenses such as transportation necessary for medical care, home or automobile renovations to accommodate a disability, certain legal fees and other costs. Over-the-counter drugs or medicines are covered only if prescribed by a doctor, with the exception of insulin, for which no prescription is needed. Other eligible over-the-counter items that are not drugs or medicines do not require a prescription.

Insurance premiums of any kind—non-FEHB coverage, Medicare Part B, Tricare, etc.—do not qualify for reimbursement. While premiums under the Federal Long Term Care Insurance Program cannot be paid from an FSA account, long-term care type expenses that are not reimbursed, such as costs incurred above the daily amount chosen for the FLTCIP coverage, can be reimbursed from an FSA.

See www.fsafeds.com/fsafeds/eligibleexpenses.asp for a listing of eligible expenses.

'Limited' Accounts—FEHB enrollees in high-deductible health plans with a funded health savings account (see Chapter 2, Section 1) are ineligible for a standard health care FSA. However, they may enroll in a “limited expense” health care FSA if their FEHB carrier offers one and may set aside up to $2,550 for a year in pretax FSA dollars, the same as non-HSA enrollees. The account can cover eligible dental and vision expenses only, including out-of-pocket costs for such service as cleanings, fillings, crowns, orthodontics, refractions, eyeglasses, contact lenses, and vision correction procedures, as well as certain other related expenses. Other expenses covered by a standard health care FSA are not covered. Also see www.fsafeds.com/fsafeds/summaryofbenefits.asp#LFSA.

FEDVIP Coverage—IRS rules do not allow for reimbursement from an FSA of expenses reimbursed by another insurance program, such as the Federal Employees Dental and Vision Insurance Program. FSAFEDS enrollees who also are enrolled in FEDVIP should not submit claims to FSAFEDS until they are sure that their FEDVIP carrier will not pay the expense. Claims may be submitted to FSAFEDS if an enrollee has used all the benefits available through FEDVIP, or certifies on the FSAFEDS claim form that the expenses will not be submitted to FEDVIP for consideration.

Qualified Reservist Distributions—Reservists may receive a distribution, known as a qualified reservist distribution, of unused health care flexible spending account or limited expense health care flexible spending account funds if they are called to active duty for 180 days or more or for an indefinite time. They may wish to do this rather than risk losing funds under the “use or lose” rule if they believe they might not incur sufficient eligible expenses to deplete the account for the benefit period. Covered reservists are those in the Army National Guard, Air National Guard, Army Reserve, Navy Reserve, Marine Corps Reserve, Air Force Reserve, Coast Guard Reserve or Reserve Corps of the Public Health Service.

A QRD refunds the balance of FSAFEDS allotments in the requestor's account as of the date of the request. This return of funds is taxable income in the year in which it is received. Receipt of a QRD closes the FSAFEDS health-care account for that benefit period. Employees receiving a QRD cannot submit additional claims for that benefit period and cannot re-enroll until the next open season. A QRD can be requested during the period beginning with the date of the order or call to active duty and ending on the last day of the grace period for the FSAFEDS benefit period during which the order or call to active duty occurs.

Employees desiring a QRD from a health care FSA should call FSAFEDS at (877) 372-3337 and be prepared to submit a copy of the order or call to active duty. Employees desiring a QRD from a limited expense health care FSA should contact the plan to inquire about its procedures.

Claims

Claims forms are available at www.fsafeds.com under Claim Forms and can be submitted online, by fax to (866) 643-2245, or by mail to FSAFEDS Program, P.O. Box 36880, Louisville, KY 40233. For fax or mail submissions, include a copy of the required documentation as described on the form. For online submissions, the required documents should be scanned and attached in .pdf, .jpeg or .tif format. Health care expense claims must include receipts and show the date(s) of service, the type of service, the amount paid, and the name and address of the provider.

Note: Some FEHB and FEDVIP carriers offer paperless reimbursement systems in which FSAFEDS will automatically reimburse out-of-pocket expenses associated with the claim. FSAFEDS enrollees can choose this option during enrollment and must re-enroll every year. There are differences among the types of claims and services each plan submits. Participating plans and other details are at www.fsafeds.com/forms/paperlessreimb.pdf.

Health Care Expenses—In addition to completing the claim form, the documentation under either item below must be attached:

• Explanation of Benefits statement (EOB). This is the statement you receive each time you, or a health care provider, submit medical, dental, or vision claims for payment to your health, dental, or vision care plan. The EOB will show the amount of expenses paid by the plan and the amount you must pay. For expenses that are partially covered by your (or your dependent’s) medical, dental or vision plans, you must attach the EOB. If you are covered under a HMO or PPO indicate “Co-Pay” on Part II of the claim form under “type(s) of service.”
• All Other Expenses. For expenses not covered at all by your (or your dependent’s) medical, dental or vision plans, reimbursement requests will not be processed without acceptable evidence of your expenses. A cancelled check alone is not considered acceptable evidence. Acceptable evidence includes detailed receipts, which contain the following information: type of service or product provided; date the expense was incurred; name of employee or dependent for whom the service/product was provided; person or organization providing the service; and amount of expense. For the health care FSA, you can receive reimbursement for claims that exceed the current amount in your account, as long as the total doesn’t exceed the total amount of your annual contribution.

Dependent Care Expenses—For allowable dependent care expenses, attach a copy of the bill or signed receipt, or have the provider complete the “Dependent Care Affidavit and Reimbursement Request” for ADP. Requests will not be processed without the Tax ID Number or Social Security Number for all providers.

For the dependent care FSA, you can only receive reimbursement up to the current amount in your account at the time you submit your claim.

Submitting Claims—You may submit claims at any time during the plan year, and up to April 30 of the following year. To be eligible for reimbursement, a dependent care expense must have been incurred in the plan year or no later than 2 1⁄2 months after the end of the plan year (the “grace period”). Health care accounts, including “limited expense” accounts, allow for carrying up to $500 from one plan year to the next (effective with the 2015 plan year; previously, those accounts used the same grace period policy as dependent care accounts).

Note: If a plan year’s account balance is not sufficient to reimburse in full an eligible dependent care expense incurred during the grace period, the unpaid balance will roll forward to an account the employee established for the succeeding year. If the employee does not have an account in the succeeding year, the expense will not be reimbursed in full.

FSAFEDS reimburses your eligible expenses from your FSA via electronic funds transfer or check payment. On average, turnaround from claim receipt to claim payment is within 10 business days. Payment will be held until your reimbursement due reaches $25, or until the end of the quarter, whichever comes first. You will receive an Explanation of Benefits (EOB) statement in the mail anytime your claim is not paid in full.

You have the right to appeal a claim for benefits that has been denied in whole or in part by writing to ADP Benefit Services KY and requesting reconsideration. All written appeal requests should be sent to FSAFEDS Program, P.O. Box 36880, Louisville, KY 40233, fax (866) 643-2245, within 60 days of the initial decision. Include an explanation of why you disagree with the denial and cite specific provisions of the program or IRS rules, documents that support your claim such as a physician’s letter of medical necessity, explanation of benefits statement or similar evidence. If FSAFEDs denies that request, you have an additional 30 days to request review by the FSAFEDS appeal committee. Its decision is subject to review by an independent third party, whose decision is final and binding.

Status on Separation

If you separate (for retirement or other purposes) before the end of a plan year, a health care FSA terminates on separation. Any expenses incurred before separation will be reimbursable, even if claims are submitted after separation. Any remaining balance in an account is not refunded. A dependent care account balance will still be available for any eligible expense incurred within the plan year.

If you return to work for the government, your FSA can be reinstated. If you return to work for a participating federal agency within 60 days and before the end of the same calendar year, your previous election will be reinstated. You will not be permitted to change the amount of your allotment unless you experienced a qualified status change within the 60 days.

If you return in another plan year, you may make a new election.

For More Information

ADP Benefit Services KY, not federal personnel offices, is the main point of contact for questions about the program, account balances, status of claims and other administrative matters. Contact FSAFEDS Program, P.O. Box 36880, Louisville, KY 40233, phone (877) 372-3337, TTY (800) 952-0450, fax (866) 643-2245, online www.fsafeds.com, email fsafeds@adp.com. The online site has features including a calculator, sign-up for electronic funds transfer and downloadable forms.

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