Health Care Flexible Spending Accounts

Janemarie Mulvey
Specialist in Aging and Income Security

Health care Flexible Spending Accounts (FSAs) are benefit plans established by employers to reimburse employees for health care expenses such as deductibles and copayments. FSAs are usually funded by employees through salary reduction agreements, although employers are permitted to contribute as well. The contributions to and withdrawals from FSAs are tax-exempt.

Historically, health care FSA contributions were forfeited if not used by the end of the year. However, in 2005, the Internal Revenue Service (IRS) formally determined that employers may extend the deadline for using unspent balances up to 2½ months after the end of the plan year (i.e, until March 15 for most plans). The Tax Relief and Health Care Act of 2006 (P.L. 109-432) allows individuals to make limited, one-time rollovers from balances in their health care FSAs to Health Savings Accounts (HSAs). In the 111th Congress, as in previous Congresses, legislation has been introduced to permit part or all of remaining balances to be rolled over to accounts next year or to qualified retirement accounts.

According to the Bureau of Labor Statistics National Compensation Survey, 33% of all workers in 2007 had access to a health care flexible spending account. When viewed by firm size, 51% of workers in firms with more than 100 workers had access to a health care FSA. The accounts were not as common for workers in small businesses. In establishments with fewer than 100 employees, 17% of the workers could choose to participate in an FSA. The average employee participation rate for FSAs has been very stable over the past decade. According to a 2008 Mercer Survey, 22% of employees participated in an FSA in 2008 (compared with 21% the prior year). In 2003, FSAs became available to federal employees for the first time. In September 2008, about 240,000 federal employees had health care FSAs.

These other points might be noted about health care FSAs:

• FSAs are limited to employees and former employees.

• The IRS imposes no dollar limit on health care FSA contributions, but employers generally do.

• FSAs generally can be used only for unreimbursed medical expenses that would be deductible under the Internal Revenue Code, but not for health insurance or long-term care insurance premiums.

• Employers may impose additional restrictions.

On March 23, President Obama signed health care reform legislation into law—the Patient Protection and Affordable Care Act (PPACA; P.L. 111-148), some provisions of which are amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152). PPACA will, among other things, limit the annual FSA contributions to $2,500 and modify the definition of qualified medical expenses to exclude over-the-counter prescriptions (not prescribed by a physician) as a qualified expense. There have also been a few legislative proposals introduced in the 111th Congress affecting FSAs.


Date of Report: May 11, 2010
Number of Pages: 12
Order Number: RL32656
Price: $29.95

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