A Flexible Spending Account (FSA) is an employer sponsored benefit that allows both the employees and the employer to save money on insurance premiums and out‐of‐pocket medical and dependent care expenses. The plan operates on a plan year basis established by the employer.

Employees can set aside money from their paycheck for the reimbursement of qualified health care expenses.

FSA plans are governed by section 125 of the IRS tax code and department of treasury regulations. Within the framework of the regulations, employers have some flexibility in designing their plan so long as the terms of the plan are applied uniformly to the employees. Here are some of the various aspects of a plan’s design that are determined by the employer.

  • The health care FSA limit
  • The claims run‐out period
  • Adding the 2 ½ month grace period
  • Offering a debit card
  • The FSA plan year
  • Pre‐tax insurance premiums

FSA plans are regulated by the IRS and the Department of Treasury and are considered a group health plan. As a result, they are subject to specific rules to ensure that the plan meets regulatory standards. There are three (3) main areas of compliance for an FSA plan — the form 5500 filing, nondiscrimination testing and the plan document and summary plan description (SPD) requirement.

The Form 5500 filing is a requirement for plans with over 100 HCFSA participants at the start of the plan year.

Nondiscrimination testing (NDT) is required for all plans to ensure that the plan does not favor highly compensated employees or key employees. Although the testing is not filed with any agency, the burden is on the employer to ensure that the plan will pass the testing requirements.

A written plan documents is required. This document governs the terms and conditions of the plan. The plan document should be updated or amended each year to account for changes in plan design. The SPD is a “layman’s” version of the plan document and is provided to the plan participants during the enrollment period.