This post is Part Three of a three-part series on the topic of Sterling Health Services Administration‘s new Flexible Benefit Plans. Part Three addresses frequently asked questions regarding Flexible Benefit Plans. Part One, published August 9, 2010, introduces Flexible Benefit Plans. Part Two, published August 11, 2010, focuses on advantages of Flexible Benefit Plans to employees and employers as well as why Sterling is a provider of choice.

Flexible Benefit Plans FAQs

What are Flexible Benefit Plans?

Flexible Benefit Plans, including Healthcare FSAs, Dependent Care FSAs, and Transit/Parking benefits, allow employees to pay for eligible healthcare, daycare, elder care and transportation expenses through payroll redirection.

What is the difference between a Healthcare FSA and a Dependent Care FSA?

The Healthcare FSA allows employees to be reimbursed for medical expenses not covered or reimbursed by other insurance and consumer directed plans like HSAs and HRAs. In order for expenses to qualify for reimbursement, they must be for medical care. All expenses must be qualified medical, vision, pharmacy or dental benefit expenses as defined in Section 213(d) of the Internal Revenue Code.

The Dependent Care FSA is a vehicle through which employees can accumulate pre-tax funds to reimburse for childcare expenses or day care expenses for a disabled or elderly/disabled dependent while they are employed. If married, the employee generally will not be able to receive benefits unless their spouse is also employed, a full-time student, or disabled.

Can I participate in both the Healthcare FSA and the Dependent Care FSA?

Yes. Participation in one type of FSA (Healthcare) does not affect participation in another type of FSA (Dependent Care), but funds cannot be transferred from one FSA to another.

How do employees benefit from participating in an FSA?

FSAs benefit employees by allowing them to pay for certain healthcare and dependent care expenses with pre-tax dollars. Each dollar that goes into the plan is free from federal, state (most) and FICA taxation.

Why do employers choose an FSA?

Employers choose FSAs for the tax savings benefits enjoyed by the company and the employees. FSAs help employers contain benefit costs, meet diverse employee needs, and increase employee satisfaction.

Who is eligible to participate in an FSA?

An employing organization sets the eligibility requirements for employees who can participate in the Healthcare FSA. Only employees may participate in a Healthcare FSA. A self-employed individual is not considered an employee for Healthcare FSA purposes.

• Domestic Partners: 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.

• Subchapter S Corporation Shareholders: Above the 2% level may not participate in cafeteria plans, but they may sponsor a plan for the employees. In addition, their family members may not participate.

• LLC, LLP and Sole Proprietors: May not participate in a cafeteria plan, but may sponsor one for their employees. However, if the spouse is a bona fide employee of the firm, he or she may participate and use the benefit for the entire family.

• C-Corporation Owners: Can participate and sponsor a plan.

Is a health insurance plan required to set-up an FSA?

No. Employers can offer FSAs without also offering health insurance plans.

Can employers contribute to an FSA?

Yes. Employers are allowed to contribute to Healthcare FSAs and Transit/Parking benefits. Employers cannot contribute to Dependent Care FSAs.

How much can employees contribute to an FSA?

Currently employers set the contribution amounts and there is no federally imposed limit. The rules are changing under healthcare reform. Effective 2013, the legislation limits contributions to no more than $2,500 annually for Healthcare FSAs. The limit is indexed to inflation for future years.

Healthcare reform legislation did not specifically address changes to Dependent Care FSAs. Under current regulations, the IRS limits the maximum annual amount you can deposit in your Dependent Care account to $5,000, or $2,500 if you are married and filing separately. The IRS imposes additional restrictions based on marital status, tax-filing status, and spousal income and work status. See your tax advisor for details.

What happens if I don’t use all the funds before the end of the year?

Unlike HSAs, FSAs are subject to a “use-it-or-lose-it” rule requiring forfeiture of unused amounts at the end of the year. And funds are not portable if the employee leaves the employer sponsoring the plan.

What types of healthcare expenses can be covered with an FSA?

The Healthcare FSA allows employees to be reimbursed for medical expenses not covered or reimbursed by other insurance and consumer directed plans like HSAs and HRAs. All expenses must be qualified medical, vision, pharmacy or dental benefit expenses as defined in Section 213(d) of the Internal Revenue Code.

The new healthcare reform law includes a change in the definition of a “qualified medical expense” and therefore a change in how funds in an FSA can be used. This change is also true for HSAs and HRAs. Beginning in January 2011, expenses incurred for over-the-counter medications will no longer be eligible for payment or reimbursement from any of these healthcare accounts. However, the law still allows over-the-counter medicines for which the patient has a doctor’s prescription, as well as insulin, to be reimbursed from these accounts.

However, “medically necessary” expenses can be run through the FSA. Generally if the participant’s doctor or healthcare provider writes a letter of medical necessity that specifies the expense is needed to treat a condition, the expense can be run through the plan as long as all other criteria are met.

Employers cannot impose limits on how FSA funds can be used.

How are claims processed and paid?

If selected, debit cards will be issued to employees and their dependents authorized to use the FSA funds for eligible expenses. In this case, expenses are reimbursed through ACH (debit card). Sterling also provides FSA Disbursement forms. These must be completed and sent with an EOB or receipt under both the Healthcare FSA and the Dependent Care FSA. Sterling will pay the employee or the provider directly based on participant preference.

Can I change my election or stop contributing money to my FSA at any time throughout the year?

No. Federal regulations state that once you have enrolled and selected the contribution amount, you cannot change your decision until your next open enrollment unless you have a family status change including:

• Employee marriage or divorce
• Birth or adoption of a child
• Change in work schedule (e.g., part-time to full-time status or full-time to part-time status) of employee, spouse or dependent
• Death of a spouse or covered dependent
• Employer or their spouse taking an unpaid leave of absence

What if I use up all the money in my account before the end of the year? Can I contribute more?

No. You can only change the amount you are contributing if you have a qualifying event in your family situation (see related question above). FSA funds can only be used for expenses incurred in the plan year. If you have an expense in one plan year, but not enough money in the FSA to cover it, you cannot be reimbursed out of the FSA for that expense in another plan year.

Can I transfer funds between accounts?

No. You cannot transfer unused funds from Medical Care Accounts to Dependent Care Accounts or vice versa.

Can an FSA be combined with an HSA?

The Limited Purpose or Post Deductible amendment to a Healthcare FSA deals with how the FSA is treated in conjunction with an HSA. Vertical stacking applies. HSA funds must be spent first for medical care until the HSA statutory deductible ($1,200 for an individual and $2,400 for a family in 2010) is satisfied. Once reached, the participant can use Healthcare FSA funds for healthcare expenses. All expenses must be qualified medical, vision, pharmacy or dental benefit expenses as defined in Section 213(d) of the Internal Revenue Code.

Does my FSA election roll over each year?

No. You must re-enroll in FSAs each year during annual open enrollment if you wish to maintain a Dependent and/or Healthcare account. Because you make a new election each year you have the opportunity to change the amount you elect.

What if I leave the company or retire during the year and still have money in my account?

You will be reimbursed for eligible expenses incurred before the date you retired or left the company. However, if you’ve been reimbursed for all the expenses you incurred during employment and still have a balance in your account, IRS regulations state that you forfeit those funds. Expenses you incur after the end of your employment are eligible for reimbursement only through the “run-out” period established by your employer. This is usually 30, 60 or 90 days after you leave the company.

Are there IRS regulations and reporting for FSAs?

Yes. Healthcare and Dependent Care FSAs are regulated by Section 125 of the IRS Code. Transit and parking benefits are regulated by Section 132 of the IRS Code. Employers are required to file Schedule C (records fees paid to Sterling to administer the plan) and Schedule H, if the employer is funding the employees’ expenses out of a trust.

Form 5500 must be filed by employers with over 100 employees. If filed, it must include Schedule C.

Are there other regulations for FSAs?

Yes. FSAs are considered group health plans and are subject to COBRA, ERISA, and HIPAA regulations.

If you have further questions regarding our new Flexible Benefits Plans, or would like to discuss how these new plans may benefit you, please Contact Us.