Medical Flexible Spending Accounts (FSAs), like many benefits, are often misunderstood. As a third party administrator, one of our greatest challenges is helping participants to better understand and use these accounts. While the advantage of saving 30-40% on eligible expenses is pretty clear, there are some rules which are not as clear and can frustrate participants.
Even if you know the rules, it can be easy to forget how they apply until you are impacted by one, which leads us to the Four Biggest Grumbles of Medical FSAs.
1. Why is someone else telling me how I can spend my money?
Flexible Spending Accounts are regulated by IRC Section 125 rules and regulations. The government permits individuals to set aside funds on a tax-free basis. These funds can be used to pay for eligible medical and dependent care expenses. In exchange, the government sets out strict guidelines to ensure funds are only spent on eligible expenses. Administrators, like Benefit Resource, are hired by employers to manage the plan. This includes ensuring compliance with the government regulations. If a plan is found to be non-compliant, penalties can apply and/or the tax-free benefit can be taken away.
2. Why can’t I change my election?
Elections to an FSA are required to be made on a plan year basis and cannot change unless a qualifying event occurs. One of the key advantages that a Medical FSA offers is that the entire election is available on the first day of the plan year. (This is also referred to as the Uniform Coverage Rule).
This provides participants with access to funds that they have not yet contributed but plan to contribute throughout the plan year. A participant’s ability to change this election is limited to ensure deposits towards the election are consistent and easy to administer.
3. Why are expenses that are clearly from doctors’ offices questioned as ineligible?
In short, administrators are required to verify that all expenses are eligible.
When a benefits card is used to pay for expenses, there are two main factors affecting an administrator’s ability to automatically verify the expense.
(A) Transaction detail: While it may be clear to the participant that the expense is eligible, the administrator does not necessarily receive the same level of detail on the transaction that the participant sees. When the details are not available through the transaction or other sources, the participant may receive a request for additional documentation.
(B) Restrictions on facilities: It would be nice to automatically approve all expenses from all doctors’ offices. Unfortunately, the reality is that most doctors’ offices cannot be automatically approved. This is because they typically have services or fees which are not eligible (e.g. cosmetic procedures, missed appointment fees, pre-payment of services, teeth whitening, veneers), in addition to eligible services.
4. Why are there deadlines for submitting claims and spending my election?
Flexible Spending Accounts are regulated by plan years. This limits the exposure and risk that an employer takes by making the full election available on the first day of the plan year. Late in 2013, under the Department of Treasury’s regulatory authority,technical guidance was released allowing for a rollover of up to $500 from one plan year to the next. This option is elected on an employer basis, but can provide some regulatory relief to participants regarding deadlines to use funds.
When you understand what these rules are and possibly make some small adjustments, you will find the Medical FSA is a win-win proposition.