Health FSA (Flexible Spending Arrangement)
Plan Documents – $129 one-time fee

Health Flexible Spending Arrangements (FSA) provide up to 40% savings on out-of-pocket medical expenses using pre-tax salary deductions. Employer tax savings often exceed the cost of setting up and administering the plan when a company lets our $129 Core FSA Plan Document package do all the work. Read on to see how everyone benefits when an employer offers a Health FSA for employees.

Deluxe binder version

Employees Save up to 40% with Tax-Free Medical, Dental, Vision Expenses at Work

$129 one-time fee in PDF via email

$179 one-time fee in PDF email + Deluxe Binder via USPS

A Section 125 plan Health Flexible Spending Account (FSA) allows employees to use up to $2,750 (2020 plan year) in pre-tax dollars to pay for eligible out-of-pocket medical, dental and vision care expenses not covered by other insurance.

The Health FSA reduces payroll taxes for both the employer and the employee, making it a popular benefit option. For the employee it’s like getting a 30% to 40% discount on medical, dental and vision care. The employer realizes up to 8 to 10% in matching FICA and other tax savings.

Employers recoup the small $129 one-time setup fee quickly and then continue to realize tax savings year after year.

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A Health FSA pays out-of-pocket medical expenses with tax-free dollars. It's like getting a discount (as much as 40%) on medical bills.

 

Background

When Section 125 tax-saving health benefit plans were first allowed by Congress and the Treasury in 1978, few rules were set as to how a company could design a plan for employees. The Health FSA was born of enterprising tax attorneys applying new (1981) pre-tax rules in 401(k) retirement savings to similar §125 pre-tax rules for health benefits.

When the Treasury learned of the Health FSAs, guidance was issued against it. Employers called out to Congress for relief; eventually, the Treasury and Congress negotiated a solution that allowed employers to offer a Health FSA benefit.

Health FSA Tax Savings

Every employee dollar put into a Health FSA comes from gross pay before taxes are calculated. That makes those before-tax dollars essentially tax-free.

Depending on an employee’s tax bracket, savings on Health FSA contributions can be as high as 40% (combined federal and state1 income taxes plus 7.65% FICA tax) with 8% to 10% in tax savings for employers (FICA plus FUTA and some state employment taxes).

Group health plan required

Section 125 rules require an individual covered by a Health FSA to first be covered by a group health plan. This can be a traditional employer-sponsored plan or, for plan years starting January 1, 2020 and later, the new Individual Coverage Health Reimbursement Arrangement.

Individual Coverage HRA option

The Individual Coverage HRA (ICHRA) is a new group health plan (as of January 1, 2020) that provides reimbursement to employees for the cost of their purchase of individual health coverage. This frees employers from the hassle and expense of sponsoring group health coverage while allowing the employee to choose the best health plan for their needs.

The final rule for ICHRAs states that it is a group plan that qualifies an individual to be covered by a Health FSA as an excepted benefit (ref. page 161 of final rule document).

Read ICHRA: Choice and affordability in employee health benefits to learn more about this new group health plan option.

Health FSA Funding

Most Health FSA contributions come via pre-tax salary deductions but many employers all choose to add funds on behalf of employees.

Employee contributions: Annual election

During open enrollment, employees choose how much to set aside in a Health FSA for eligible medical expenses in the new plan year. This amount is divided by the number of pay periods in the plan year so that an equal amount is deducted from each paycheck.

Employees must be careful when stating the annual election amount since any funds remaining in a Health FSA at the end of a plan year are surrendered2 to the employer.

The annual election amount cannot be changed during the plan year unless the employee or a covered dependent has a qualifying life event that triggers a special enrollment period.

Employer contribution methods

An employer can enhance tax savings and employee coverage by making optional Health FSA contributions.

Employer funding can create a minimum fund amount for all employees, match employee contributions, or a combination of the two.

For more information on employer contributions, see Can employers add to employee Health FSA contribution?

Potential loss of funds

When the Treasury agreed to allow a Health FSA, it insisted on two rules that would provide some insurance against abuses. Both carry risk — use-it-or-lose-it for the employee, and uniform coverage for the employer.

Use-it-or-lose-it rule

As the name implies, unused funds remaining in a Health FSA at the end of the plan year are surrendered to the employer (who may use it to cover administrative expenses of the plan).

This is why it is important for employees to carefully calculate the annual election amount for a Health FSA to cover expected eligible medical expenses without significant overage that could be lost if not used.

Grace period

In 2005, the IRS modified this rule with the addition of a grace period up to 2 months and 15 days following the end of the plan year. Claims made to a Health FSA during the grace period may be paid using unused funds from the prior plan year.

Limited rollover

In 2013, another modification to the rule was the introduction of a limited rollover of unused Health FSA funds to the new plan year. The amount of the rollover is capped at $500 but may be set lower at the employer’s option.

One or the other

Employers may choose to allow the grace period or the limited rollover but not both.

Uniform coverage rule

Section 125 Cafeterial plan rules for Health FSAs state, “the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period.”

This means that throughout the plan year, an FSA may expenses from employer funds and be replenished by periodic pre-tax salary deductions. It also means an employee can submit an eligible medical expense for 100% of the annual amount on January 20, leave the company on January 21, and the employer has no recourse to collect the overpaid FSA funds.

An employer can put no limit on how much can be reimbursed from the Health FSA per month, quarter, etc., but some companies reduce risk by limiting how much each employee can elect to contribute. For more on this topic, see Health FSA prefunding rule.

Annual funding limits

IRS limit

Every year, the IRS announces inflation-adjusted contribution limits for benefits like the Health FSA. For 2020, this amount is $2,750.

Employer limit

An employer can set a lower limit for the plan year. One reason some employers do this is to limit potential risk inherent in uniform coverage rules.

 


NEW for 2020: CARES Act repeals “Medicine Cabinet Tax” on OTC reimbursements and expands items eligible for coverage

The Coronavirus Aid, Relief, and Economic Security (CARES) act removes the requirement for a physician’s prescription for many over-the-counter items eligible for Health FSA, HSA, and HRA coverage, while expanding the list of eligible items and providing safe harbor to HDHPs associated with an HSA to cover pre-deductible telehealth and other remote care services. Read, Coronavirus “CARES Act” restores OTC coverage for FSAs, HRAs, HSAs to learn more.


Eligible participants

Employers may allow reimbursements to employees and their eligible dependents or to employees only. It is also up to the employer to set any eligibility rules relating to hours worked or a waiting period.

Generally, an employer cannot participate in a Section 125 plan. The rules limit participation to employees only and prohibit participation of a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation.

Eligible expenses

A Health FSA can pay or reimburse eligible medical expenses as set out in IRS Publication 502 (summarized here).

An employer may elect to set up a “limited” Health FSA to reimburse only excepted benefits (such as dental and vision), which can be especially useful to employees selecting a HDHP/HSA combination in the cafeteria plan.

How to establish a Health FSA

Plan year

The company must choose the Plan Year for the Health FSA.

A Section 125 plan with Health FSA can start at any time of the year. Usually, an employer will set a plan year to match the group health insurance plan renewal.

When an employer wants to set a plan in place right away, a short Plan Year is used. Let’s say an employer wants a normal plan year of January 1 to December 31 but wishes to start the new plan in July of this year.

The first plan year will run July 1 to December 31, and all following plan years will run January 1 to December 31.

Terms

The employer designs the plan according to desired terms related to employee eligibility, amount employees may contribute, amount employer will contribute, and whether or not the company allows a partial roll-over (up to $500) or grace period (up to 2.5 months) for unused funds at the end of the plan year.

Plan document

To pre-tax employee Health FSA contributions, the company must have a plan document.

By law, a Section 125 plan is defined as a “written plan” that documents the structure, rules, and sponsor information of the plan. Failure to have that plan document means there is not a compliant plan in place, and the employer’s pre-tax treatment of employee premiums violates tax law.

This requirement is often missed by employers setting up a group health plan for the first time. The insurance agent or accountant usually assumes the other takes care of it. Ultimately, it is the employer’s responsibility to make sure it is done.

Updates

A plan document needs an update when there is a change in your plan or in tax and health care law that require it. Core Documents advises clients when there is a change in the law; you let us know of any change to your group benefit plan.

Ideally, a Section 125 plan document is renewed at least every five years.

It is not unusual for a group to lose track of a plan document and need to replace it. Contact us right away so we can help get a new plan document in place for you as soon as possible.

The Core Health FSA package

For the all-inclusive low price of $129, every Core FSA plan document package includes the following materials, all customized for your company and plan:

  • Section 125 Premium Only Plan Document with Health FSA module;
  • Corporate Resolution to Adopt a Section 125 Plan with Health FSA;
  • Administrative Handbook;
  • Summary Plan Description (SPD);
  • Premium enrollment, election, and claim forms.

Set-up is as easy as (1) the employer signing in the two places indicated, (2) making copies and distributing the SPD and forms to employees, (3) processing completed employee elections, and then (4) filing the plan document and employee forms with other personnel items.

There is no requirement to file the plan document with any agency, only to keep it on hand and available upon request from plan participants or auditors.

Administration

Enrollment and election

At the start of the Plan Year, eligible employees are given an enrollment and election packet. This is where the employee will enroll or decline the plan and then choose how much to contribute for the year.

Newly eligible employees must be enrolled into the plan. Simply give them the enrollment and election forms given to all employees at the start of the Plan Year.

Reimbursement

When an employee has paid an eligible medical expense, a claim for reimbursement through the Health FSA will be submitted to the employer.

The employer will verify substantiation of the expense (receipt, etc.) and then issue payment to the employee, keeping a record of the employee’s Health FSA account balance.

HIPAA privacy rules may apply when a company self-administers a Section 125 Health FSA.

Accounting

The employer may retain funds for the Health FSA in the company’s general account until a reimbursement is made. There is no need for a separate bank or trust account.

CoreAdmin for Health FSA administration

Employers that prefer to outsource plan administration should consider CoreAdmin services. Eliminate the need to enroll new employees, update changes, and track employee expenses when employees have 24/7/365 online access to their Health FSA account information. Plus, participants enjoy the convenience of a FSA debit card to pay providers on-the-spot. Learn more: CoreAdmin Convenience: HRA, HSA, FSA Administration Services.

Core Documents’ Health FSA Plan Document

Deluxe binder version

Employees Save up to 40% with Tax-Free Medical, Dental, Vision Expenses at Work

$129 one-time fee in PDF via email

$179 one-time fee in PDF email + Deluxe Binder via USPS

A Section 125 plan Health Flexible Spending Account (FSA) allows employees to use up to $2,750 (2020 plan year) in pre-tax dollars to pay for eligible out-of-pocket medical, dental and vision care expenses not covered by other insurance.

The Health FSA reduces payroll taxes for both the employer and the employee, making it a popular benefit option. For the employee it’s like getting a 30% to 40% discount on medical, dental and vision care. The employer realizes up to 8 to 10% in matching FICA and other tax savings.

Employers recoup the small $129 one-time setup fee quickly and then continue to realize tax savings year after year.

order-online

fax-order-form

Our secure encrypted online ordering system accepts:

payment logos


No annual fee — Core Documents does not require an annual renewal fee to maintain your plan document package. A plan document only needs to be updated when there are changes in the plan or in the law that make it necessary. We will notify you when there are sufficient changes in the Code to require amending and restating your Plan and ask that you keep us informed when there is a change to your plan. You can amend and update your plan document anytime, at a discounted fee and only when necessary, which is the most cost-effective way to maintain it.

Fast Service — Most orders placed by 3 PM are returned via email the same day, Monday through Friday. Weekend orders are sent out Monday morning. Plan document packages are processed in the order received. During our busiest months (December, January, and February), the rush order fee (see order form) marks your document to be processed immediately.

Refund Policy: Goods and services provided by Core Documents, Inc. are non-refundable upon receipt. Orders cancelled prior to shipping are subject to a fee to cover the cost of goods and services provided during the review, draft, and preparation of your order.


The Trusted Source of Affordable Benefit Plan Documents for over 20 Years.

Core Documents is the country’s leading provider of cost-effective, tax-saving benefit plan documents for Section 125 Cafeteria plans and Health Reimbursement Arrangements. The Trusted Source since 1997, thousands of satisfied agents and employer groups nationwide rely upon Core Documents for free plan design consulting services, plan document updates, ERISA Wrap SPDs, and administrative services.

Video: How to Set up a Health FSA


PDF Brochure: Core Health FSA Plan Documents and Forms

Core Cafeteria Health FSA Plan Document Brochure