About Healthcare FSAs
Healthcare FSAs allow employees to be reimbursed for medical expenses not covered or reimbursed by other insurance or plans like HSAs and HRAs. All expenses must be for qualified medical, vision, pharmacy or dental services as defined in Section 213(d) of the IRS Code.
What Items are FSA-Eligible?
To view a list of FSA-eligible items courtesy of our partner, the FSA Store, click here.
The FSA Store
Sterling has partnered with The FSA Store to provide an easy online shopping experience for all FSA-eligible items.
All medical care expenses must be incurred during the plan year and the “use it or lose it” rule applies to any funds not spent before the end of the plan year. Unlike HSAs, funds in a Healthcare FSA do not roll over to the next plan year unless your employer has elected an optional rollover of up to $550. Funds may also be forfeited if you leave the company.
Annual Contribution Limits
The annual contribution maximum for a Healthcare FSA in 2021 is $2,750.
The annual contribution maximum for a Healthcare FSA in 2020 is $2,750.
Limited Purpose/Post Deductible FSA
The Limited Purpose or Post Deductible FSA deals with how the FSA is treated in conjunction with health savings accounts (HSAs). The Limited Purpose FSA allows funds to be used only for qualified dental or vision expenses. The Post Deductible FSA allows funds to be used for qualified medical expenses as well, but only after the health plan statutory deductible is met. HSA funds must be spent first for medical care until the HSA statutory deductible is satisfied for medical expenses. The same expense cannot be reimbursed from an HSA and FSA. All expenses must be qualified medical, vision, pharmacy or dental benefit expenses as defined in Section 213(d) of the IRS Code.
Sterling offers Limited Purpose or Post Deductible FSAs as a stand-alone service when employers already have an HSA and cannot also have a Healthcare FSA, or in conjunction with a full-flex benefits package. We will work with the employer to coordinate the payment of claims from the HSA and FSA to comply with regulations.
If an employer adopts the Limited Purpose FSA mid-year, the existing General Purpose FSA will be terminated and the new Limited Purpose FSA will be opened and new plan documents will be produced. However, any elections made by the participant may not be changed mid-year unless the employee experiences a qualifying ent.
Dependent Care FSAs
A Dependent Care FSA allows employees to accumulate pre-tax funds to reimburse for childcare expenses or day care expenses for a disabled or elderly/disabled dependent. If married, the employee generally will not be able to have a Dependent Care FSA unless their spouse is also employed, a full-time student, or disabled. In other words, both must need to work outside the home necessitating outside care for eligible dependents.
Depending on the tax bracket, paying for dependent care expenses with pre-tax dollars may provide substantial tax savings to the employee. Employers also benefit from the lower tax base of employee contribution that is redirected.
In general, you can use your dependent care funds to pay for:
- Licensed nursery schools
- Qualified childcare centers
- Adult day care facilities
- After school programs
- Summer camps for dependent children under age 13
- Preschool tuition
For information on Dependent Care eligible expenses visit http://www.irs.gov/pub/irs-pdf/p503.pdf. In general, dependent care expenses eligible for reimbursement include services provided for:
- A tax dependent under age 13
- Any other tax dependent, such as an elderly parent, who is physically or mentally incapable of self-care and has the same principal residence as the employee participant
- A spouse who is physically or mentally incapable of self-care and has the same principal residence as the employee participant
Ineligible expenses include:
- The cost of schooling
- Dependent care expenses paid to: one of your dependents, your spouse, or one of your children who is under the age of 19
Transit & Parking Benefits
Employees are allowed to set aside pre-tax compensation in two categories – transit and parking. In the transit category, qualified commuter expenses generally include expenses for the use of mass transportation – train, subway, bus, transportation in a commuter highway vehicle, transit passes, and qualified bicycle reimbursement.
Transit and parking benefits are governed by IRS Code Section 132. The transit and parking benefit does not include a “use it or lose it” penalty, as is the case with Healthcare FSAs and Dependent Care FSAs. Federal income tax and FICA taxes are not imposed on amounts set aside. Depending on state law, employees may also avoid state and local income taxes.
Employers also get tax benefits because they pay no payroll taxes on the income set aside by the employee and receive an equivalent deduction from business income.
Transit and parking maximum contributions are set by the IRS and are generally adjusted annually for inflation.
The 2020 limits are $270 monthly for transit and $270 monthly for parking. The bicycle commuting limit is $20 monthly.
The 2021 limits are $270 monthly for transit and $270 monthly for parking.
Almost all employees can participate in Flexible Benefit Plans. Exceptions include partners in a business, members of LLCs, and shareholders who own 2% or more in S-corporations. Only employees may participate in a Healthcare FSA or Dependent Care FSA.
Domestic partners are eligible to use an employee’s FSA only if the domestic partner is also a dependent under IRS Code 152. Domestic partners that do not qualify as dependents are not eligible for an employee’s FSA reimbursements.
FSAs cannot discriminate in favor of highly compensated employees. Annual nondiscrimination testing is required with FSAs to insure that the employer meets participant eligibility requirements. Sterling offers nondiscrimination testing annually for compliance.