Flexible Spending Accounts
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. including U.S. Postal Service employees, are eligible to enroll in the FSAFEDS program of health care and dependent care FSAs, administered by WageWorks, Inc. under contract with the Office of Personnel Management. The Judicial Branch 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 eligibility for FSAs except that employees enrolled in a Federal Employees Health Benefits program plan with a health savings account (see Chapter 2, Section 1) are eligible only for “limited expense” health care FSAs 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 www.fsafeds.com/support/savingscalculators.
Federal agencies absorb the fees WageWorks charges to operate accounts.
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) 353-8058, 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 after September 30 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 $2,700 in 2019. If both of a married couple (note: common law marriages recognized for tax purposes may qualify) have health care FSAs available through their own employment, each may have an account up to that limit. Combined amounts for dependent care FSAs may not exceed $5,000, however. The minimum amount for each type of account is $100 per plan year. WageWorks 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 WageWorks at the contact points listed at the end of this section (if WageWorks discovers such an error it will inform 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 $5,000 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 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 dependents for tax purposes you have (for example, a dependent 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.
WageWorks 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.
Those wishing to enroll, cancel or change their election due to a change in status must notify WageWorks between 31 days prior to the event and 60 days after by completing the Qualifying Life Event process through www.fsafeds.com or by calling (877) 372-3337, TTY (866) 353-8058. The denial of such a request can be appealed under procedures described under Claims, below.
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 any reductions to future Social Security benefits 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.
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.
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. For example, an individual getting a $2,000 annual child care subsidy would be eligible only for a $3,000 dependent care FSA.
A listing of eligible expenses is at www.fsafeds.com/support/EligibleExpenses.
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:
• 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. A qualifying child is defined as a tax dependent child up to age 26 or any age if permanently disabled.
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. A listing of eligible expenses is at www.fsafeds.com/support/EligibleExpenses.
'Limited' Accounts—FEHB enrollees in high-deductible health plans with a funded health savings account (see FEHB Plan Options in 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 $2,700 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 expenses. Other expenses covered by a standard health care FSA are not covered.
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 described in How Accounts Work, above. 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 from the date of the order or call to active duty until on the last day of the benefit period during which the order or call to active duty occurs.
Employees desiring a QRD from a health care FSA should download the “HEART ACT-QRD” form at www.fsafeds.com (select File a Claim, then Other Forms) or call (877) 372-3337 to request the form, then submit it according to the instructions on the form along with the order or call to active duty.
Claims forms are available at www.fsafeds.com under File a Claim and can be submitted online, by fax to (866) 643-2245, by mail to FSAFEDS Program, P.O. Box 14127, Lexington, KY 40512-4127, or through a mobile application available for download at www.fsafeds.com. Be sure to include the documentation required. Some FEHB and FEDVIP carriers offer paperless reimbursement systems in which FSAFEDS will automatically reimburse eligible expenses; linkage of separate accounts of two spouses so that when one account is exhausted paperless reimbursement claims are automatically processed against the other also might be available. Reimbursement options include payment by check, direct deposit or payment directly to a provider. See www.fsafeds.com/Support/ReimbursementsAndPayments.
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.” 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 (calendar) year or no later than 21⁄2 months afterward (the “grace period”). Only expenses incurred during the plan year are reimbursable in a health care account, but those accounts, including “limited expense” accounts, allow for carrying up to $500 to the next year so long as the account holder has such an account in the following year.
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 you establish for the succeeding year. If you do not have an account in the succeeding year, the remaining amount will not be reimbursed.
You have the right to appeal a claim for benefits that has been denied in whole or in part. First, call (877) 372-3337, TTY (866) 353-8058, within 30 days of the denial to get a fuller explanation of the decision; benefits counselors are available 9 am to 9 pm Eastern time on standard business days. The next step is to file a formal written appeal by writing to FSAFEDS Program-Appeals, P.O. Box 14800, Lexington, KY 40512-4800, fax (866) 852-2599, 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. FSAFEDS will make a written decision on the appeal within 30 days of receiving it. If it denies your request, you have an additional 30 days to request review by the FSAFEDS appeals committee, which will make a written decision within 30 days of receiving the appeal. That decision in turn may be appealed within 30 days to an independent third party arbitrator, who will make a decision within 30 days of receiving that appeal. The third party’s decision is final and binding.
The same process applies to the denial of a request to change an election due to a qualifying life event.
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
WageWorks, Inc., 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 P.O. Box 14800, Lexington, KY 40512-4800, phone (877) 372-3337, TTY (866) 353-8058, fax (866) 852-2599, online www.fsafeds.com. The site has features including a calculator and downloadable forms and access to personal accounts with options to begin or change elections when eligible, elect paperless reimbursement if available, file claims, choose among reimbursement options, send secure messages, download a mobile application, and more.