The government offers employees Flexible Spending Accounts (FSAs), in which they can designate payroll money to be withheld on a pre-tax basis to be put into accounts usable for certain dependent care and medical and dental care expenses (note: temporary employees and employees working on seasonal or intermittent schedules usually are eligible for a flexible spending account only if they are eligible for health insurance).
Health Care Flexible Spending Account (FSA)
A health care FSA allows an employee to use pre-tax allotments to pay for certain health care expenses that are not reimbursed by any other source and not claimed on the participant’s income tax return.
The annual minimum an employee may set aside is $100 and the maximum is $2,850; if both members of a married couple are separately eligible for an FSA through their employment, each may have an account of up to that limit. The general rule is that the money can be used for medical costs that would count on an individual’s tax return against the 7.5 percent of adjusted gross income above which such costs are deductible. That would include, for example, health insurance copayments and deductibles, dental and vision care not paid by insurance.
Over the counter medicines and drugs are included only if prescribed by a doctor, with the exception of insulin. Some types of care, such as most cosmetic surgery, are excluded. Also, premiums of long-term care insurance, such as in the Federal Long Term Care Insurance Program, cannot be paid through FSAs. However, FSA participants can use those accounts to pay for long-term care expenses not paid by their or their spouse’s FLTCIP coverage, such as expenses greater than the daily benefit amount payable under the FLTCIP coverage.
Dependent Care FSA
A dependent care FSA, through which employees may use pre-tax allotments to pay for eligible dependent care expenses of between $100 and $5,000 annually ($2,500 maximum if the employee is married and filing a separate income tax return).
This includes reimbursement of day care expenses for dependent children under age 13 and for dependent adults, including parents and siblings, but not long-term care type expenses, nor if an adult resides in another city.
The general requirement is that the participant must be paying for such care services in order to be able to work. Thus, it would apply to situations of two working spouses or one working spouse and one student, but not to one working spouse and one stay at home spouse.
To be eligible, the expense would have to be paid to a care provider who pays taxes on income received for providing care.
A detailed listing of eligible expenses is at https://www.fsafeds.com/fsafeds/eligibleexpenses.asp.
Agencies pay enrollment fees on behalf of their employees. However, agencies make no contributions toward the accounts. Employees who elect to participate set aside an annual amount of salary to be contributed to their FSA.
The agency will deduct these contributions from the employees’ pay throughout the plan year and remit them to the FSA administrator for deposit into the employees’ FSA accounts. (Participants do not pay employment taxes on these allotments.)
A plan year is a calendar year
Participants are required to make a new enrollment each year and they cannot change their elections during a plan year except in the case of a “life event” such as marriage.
For dependent care FSAs, the participant can draw out only what he or she has put in to date in the plan year. Participants may only submit claims after the dates of service have passed.
Employees can draw upon medical FSA accounts for reimbursement as they incur eligible expenses. They need not have paid an amount equal to a claim before drawing money out to cover that claim. Further, employees who leave government service during a calendar year and have drawn out more in claims than they have paid in are under no obligation to make payments to cover the difference.
Money in an FSA is “Use or Lose”
Money in FSA accounts is “use or lose” with these exceptions: there typically is a grace period of 2 ½ months into the following year during which dependent care money not spent in the plan year may be spent in the following year; and for health care accounts (including “limited expense” accounts, as described below), up to $570 typically can be carried from one year to the next. Both of those exceptions require that the employee have an account in the following year.
However, a series of laws enacted in late 2020 and early 2021 temporarily waived the dollar limit on carrying unspent health care account money from one year to the next and extended through the end of the year the deadline for carrying unspent dependent care account money into the following year. Both changes applied to both 2020 money carried into 2021 and 2021 money carried into 2022; in each case the employee needed an account in the following year to qualify.
Employees eligible for FEHB (even if not currently enrolled) are able to elect a health care FSA to cover expenses not covered under their FEHB plan—deductibles, coinsurance and copayments, as well as services not generally covered such as dental care, orthodonture, etc.
All federal employees (including employees with temporary, seasonal and intermittent appointments) are able to elect to participate in the dependent care FSA for eligible dependents. Annuitants (except for reemployed annuitants) are not eligible for coverage. However, reemployed annuitants are eligible; they must have their FSA deductions taken from their pay as employees, not from their annuities.
Employees make elections to participate in one or both types of FSA in the following year during the benefits open season each autumn.
Participation in an FSA is not automatic; employees must make an election every year. Employees must make two benefit elections—whether they wish coverage in one or both of the FSAs and the annual amount they agree to have deducted from their pay during the plan year for deposit into their FSA accounts. The benefit elections are irrevocable once the plan year has begun, unless the employee experiences a qualifying change in status event.
Benefit elections are effective on the first day of the first payroll period that begins on or after the start of a plan year and that follows a pay period during any part of which the employee was in pay status. The benefit elections will terminate with the first pay period ending at the start of the following year.
Eligible employees who did not have an opportunity to elect coverage during an open enrollment period may elect to participate immediately upon entry-on-duty. Information on enrollment is available through federal personnel offices and at www.fsafeds.com, although the plan administrator, ADP Benefit Services KY, Inc., is responsible for providing educational materials and customer service, integrating participant elections with agency payroll systems and other administrative matters.
FSA and Taxes
FSA deductions are excluded from wages before federal income taxes are applied. They also are excluded from wages before most state and local income taxes are applied. Each state and local government, however, makes individual determinations as to whether to allow the pre-tax treatment for deductions under FSAs. Check with your state’s tax authority.
FSA deductions are excluded from wages before FICA taxes are applied.
Leave Without Pay and FSAs
If you go on a period of leave without pay, your agency will not contribute to the allotments during the LWOP period.
You generally have two options in this case. Option one: you can elect to prepay the allotments, which will increase the per pay amount. If you go into a period of LWOP and have not prepaid your election, your FSA account will be frozen and you will not be eligible for reimbursement for any expenses incurred during that period until the plan year ends or you return to active status and begin making allotments again.
When you return, your allotments will be made on a “catch-up” basis, which means your allotment will be doubled until such time you are current. If doubling the amount is not sufficient to “catch-up” by the end of the plan year, your allotment will be increased proportionately over the pay dates remaining in the plan year.
Or, option two is to pay the allotments directly on an after-tax basis.
Note: LWOP is not a “qualified status change” and you will not be permitted to change your election amounts upon return to service.
Limited Expense FSA Account
A “limited expense” health care FSA — limited to certain eligible dental and vision expenses — is available to FSA enrollees who also are enrolled in a high deductible health savings account plan in the Federal Employees Health Benefits program. In general, health care FSAs are not available to those enrolled in such FEHB plans, but IRS rules permit individuals to have a health savings account and a limited FSA.
Money put in a limited expense FSA—like a typical health care FSA account, from pre-tax payroll dollars and up to the same limit—can be used to pay for services such as dental cleanings, fillings, crowns and orthodontics, and for vision care, for refractions, eyeglasses, contact lenses and vision correction procedures. Other expenses normally eligible under a general health care flexible spending account are not eligible under a limited health care flexible spending account. Allowable maximums are the same as for a regular health care FSA.
FEHB carriers are responsible for notifying HSA enrollees if they are eligible to enroll in a limited health care FSA. Enrollees have 30 days after being notified by their FEHB plan to establish their limited health care FSA by following the procedures on the notice. Limited FSAs cannot start until the enrollee has at least some money in the high deductible FEHB plan health savings account.
FSAs Terminate at Separation
A health care FSA terminates as of the date of your separation. You will not receive the balance in your account as a refund. Any health care expenses incurred prior to the date of separation will still be reimbursable but those incurred after the date of separation will not, even if there is still money in your account.
A dependent care account balance at the time of separation will still be available to you for any eligible expenses incurred within the plan year.
If you separate and return to work for the government, an FSA can be reinstated. As long as you return to work for a participating federal agency within 60 days and before the end of the same tax calendar year, your previous election will be reinstated. You will not be permitted to change the amount of your allotment. If you return in another plan year, you will be given an opportunity to make a new election. If there has been a “qualified status change” within the 60 days, you may modify your election.