A Flexible Spending Account (FSA) is a great, tax-saving solution that helps employees pay for healthcare expenses not covered by their insurance, but FSAs must meet certain rules and regulations set by the Internal Revenue Service.
FSAs are an IRS-regulated benefit because eligible reimbursements from an FSA are not taxed. Additionally, contribution limits and updates like the update to the “Use It Or Lose It Rule” are also set by the IRS. For these reasons, employees need to understand IRS regulations surrounding FSAs. Failure to comply with these regulations can result in costly penalties and fines.
Here are five questions employers need to ask to ensure their FSAs are in compliance with the IRS:
1. What IRS regulations should I be aware of for FSAs?
Healthcare FSAs are governed by Internal Revenue Code Section 125 when offered through a cafeteria plan. A cafeteria plan is a written plan that offers employees a choice between receiving their compensation in cash or as part of an employee benefit. If the healthcare FSA isn’t offered through a cafeteria plan, it’s subject to Internal Revenue Code Section 105, which allows employers to establish a written plan to reimburse medical expenses for employees. These plans are usually subject to ERISA, COBRA and HIPAA laws.
2. Can an FSA be offered with any health plan?
Yes. An FSA plan can be offered alongside any medical or dental plan. However, it’s important to note that employees can only enroll in a limited-purpose FSA if they also contribute to an HSA according to IRS regulations.
3. Can employees change their FSA contribution amount?
Due to IRS regulations, enrollment and contribution amounts remain in effect for the plan year, unless there is a qualifying family status change, such as a marriage, birth or death of a dependent.
4. Can owners or partners participate in an FSA?
No. According to IRS guidelines, anyone with 2% or more ownership in a scheduled S corporation, LLC, LLP, PC, sole proprietorship, or partnership may not participate. However, C-corporation owners and their families are eligible to participate in FSA plans because they are considered to be W-2 common law employees.
5. Do non-discrimination rules apply?
Yes. Based on requirements set by the IRS Section 125 Cafeteria, FSAs cannot discriminate in favor of highly compensated or key employees. To meet compliance with IRS regulations, non-discrimination tests are conducted as a way to demonstrate fairness in benefit plans among all levels of employees. Many of these tests involve eligibility by examining who can participate, the benefits offered and contributions, and utilization.
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At Clarity Benefit Solutions, we understand employee benefits can be confusing–especially when it comes to compliance with IRS regulations. Our team of experts is ready to help you by anticipating your needs, providing exceptional customer service and consistently looking for new ways to innovate your benefits. If you have any questions about compliance, please contact us today.