Flexible Spending Account (FSA)

Flexible Spending Accounts operate according to IRS Section 125 regulations and they are used for the tax-preferred reimbursement of qualified medical expenses as defined by Section 213d of the IRS code.  The IRS limit for 2017 is $2600.

When an employee enrolls in a FSA, it is for the entire plan year (as determined by the employer). During enrollment, the employee determines the dollar amount they want to contribute to the FSA, which is not to exceed the maximum set by their employer, and that annual amount is divided by the number of payroll periods in the plan year and deducted each pay period. During the plan year, employees access these tax-preferred funds with a debit card, or file paper claims.

An employee may change their contribution amount within 60 days of a qualified status change (i.e., marriage, divorce, death, etc.). Should an employee have a positive balance in their FSA at the end of the plan year, that amount will be forfeited back to the employer and used to offset plan administrative costs. In 2014 the IRS changed the FSA regulations to permit employers to offer the option of a $500 annual rollover. Few employers have taken advantage of that provision, but you should be aware that it is available.

By law, during the plan year, the employee will need to provide proof of purchase to the FSA administrator to verify the funds were spent on qualified medical expenses. The frequency of receipt verification should not overburden employees because they will occur most frequently as a result of a purchase made at a pharmacy or grocery store versus the doctor’s office. Most merchants (CVS, Walgreens, Rite Aid, etc.) are now equipped with the Inventory Information Approval System (IIAS), which verifies qualified medical expenses paid for by the FSA debit card. Employees should retain their receipts in case they are audited.

If an employee terminates employment during the plan year, deductions will stop at the point of employment termination. Coverage for qualifying expenses ends at the date of the last payroll deduction. The FSA is a COBRA-eligible benefit and can be elected by the employee when they terminate employment, although it must then be funded with after-tax dollars. In either event, this provision is particularly helpful to the employee, so they will not leave a positive balance in the FSA.

Coaches' Takeaway

The employer sets the plan year timeline and maximum amount that may be contributed, not to exceed $2,600. Administration of the FSA is usually done by a third-party administrator (TPA) and the cost is typically offset by savings in payroll taxes and (in most cases) forfeited employee deductions under the “use it or lose it” rule.

Tools & Resources

CDHPCoach’s Storage Facility, where the Coach has organized and compiled a vast amount of tools and resources for you to access.


Housed here are key components and information within the book, Bend the Healthcare Trend which was the impetus behind the CDHPCoach.