skip navigation

Search Help
Navigation Help

Topic Index
ABCDEFGHI
JKLMNOPQR
STUVWXYZ#

Affordable Care Act
Tax Topic Index

International
Tax Topic Index

FAQs
Forms
Publications
Tax Topics

Comments
About Tax Map

IRS.gov Website
Publication 969
taxmap/pubs/p969-002.htm#en_us_publink1000204174

Flexible Spending Arrangements (FSAs)(p15)

rule
A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contribution. The employer may also contribute.
Note. Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for FSAs on your income tax return.
For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier.
taxmap/pubs/p969-002.htm#en_us_publink1000204176

What are the benefits of an FSA?(p15)

rule
You may enjoy several benefits from having an FSA.
taxmap/pubs/p969-002.htm#en_us_publink1000204178

Qualifying for an FSA(p15)

rule
Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.
Self-employed persons are not eligible for an FSA.
EIC
Certain limitations may apply if you are a highly compensated participant or a key employee.
taxmap/pubs/p969-002.htm#en_us_publink1000204180

Contributions to an FSA(p16)

rule
You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. This is sometimes called a salary reduction agreement. The employer may also contribute to your FSA if specified in the plan.
You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income.
taxmap/pubs/p969-002.htm#en_us_publink1000204181

When To Contribute(p16)

rule
At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan.
taxmap/pubs/p969-002.htm#en_us_publink1000204182

Amount of Contribution(p16)

rule
For plan years beginning after December 31, 2012, salary reduction contributions to a health FSA cannot be more than $2,500 a year (or any lower amount set by the plan). This amount is indexed for inflation and may change from year to year.
Generally, contributed amounts that are not spent by the end of the plan year are forfeited. However, see Balance in an FSA, later, for possible exceptions. For this reason, it is important to base your contribution on an estimate of the qualifying expenses you will have during the year.
taxmap/pubs/p969-002.htm#en_us_publink1000204184

Distributions From an FSA(p16)

rule
Generally, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage. You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.
You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage. The FSA cannot make advance reimbursements of future or projected expenses.
Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in a health FSA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the health FSA. For information on these methods, see Revenue Ruling 2003-43 on page 935 of Internal Revenue Bulletin (IRB) 2003-21 at www.irs.gov/pub/irs-irbs/irb03-21.pdf, Notice 2006-69, 2006-31 I.R.B.107 available at www.irs.gov/irb/2006-31_IRB/ar10.html, and Notice 2007-2, 2007-2 I.R.B. 254 available at www.irs.gov/irb/2007-2_IRB/ar09.html.
taxmap/pubs/p969-002.htm#en_us_publink1000204185

Qualified medical expenses.(p16)

rule
Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502.
Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for FSA purposes. A medicine or drug will be a qualified medical expense for FSA purposes only if the medicine or drug:
  1. Requires a prescription,
  2. Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or
  3. Is insulin.
Qualified medical expenses are those incurred by the following persons.
  1. You and your spouse.
  2. All dependents you claim on your tax return.
  3. Any person you could have claimed as a dependent on your return except that:
    1. The person filed a joint return,
    2. The person had gross income of $3,900 or more, or
    3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return.
  4. Your child under age 27 at the end of your tax year.
You cannot receive distributions from your FSA for the following expenses.If you are covered under both a health FSA and an HRA, see Notice 2002-45, Part V, which is on page 93 of IRB 2002-28 at www.irs.gov/pub/irs-irbs/irb02-28.pdf.
EIC
You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution you receive from the FSA.
taxmap/pubs/p969-002.htm#en_us_publink1000204189

Qualified reservist distribution.(p17)

rule
A special rule allows amounts in a health FSA to be distributed to reservists ordered or called to active duty. This rule applies to distributions made after June 17, 2008, if the plan has been amended to allow these distributions. Your employer must report the distribution as wages on your Form W-2 for the year in which the distribution is made. The distribution is subject to employment taxes and is included in your gross income.
A qualified reservist distribution is allowed if you were (because you were in the reserves) ordered or called to active duty for a period of more than 179 days or for an indefinite period, and the distribution is made during the period beginning on the date of the order or call and ending on the last date that reimbursements could otherwise be made for the plan year that includes the date of the order or call.
taxmap/pubs/p969-002.htm#en_us_publink1000204190

Balance in an FSA(p17)

rule
Flexible spending accounts are generally "use-it-or-lose-it" plans. This means that amounts in the account at the end of the plan year generally cannot be carried over to the next year. However, the plan can provide for either a grace period or a carryover.
The plan can provide for a grace period of up to 21/2 months after the end of the plan year. If there is a grace period, any qualified medical expenses incurred in that period can be paid from any amounts left in the account at the end of the previous year. Your employer is not permitted to refund any part of the balance to you. See Qualified reservist distribution, earlier.
For plan years beginning after December 31, 2012, plans may allow up to $500 of unused amounts remaining at the end of the plan year to be paid or reimbursed for qualified medical expenses you incur in the following plan year. The plan may specify a lower dollar amount as the maximum carryover amount. If the plan permits a carryover, any unused amounts in excess of the carryover amount are forfeited. The carryover does not affect the maximum amount of salary reduction contributions that you are permitted to make.
A plan may allow either the grace period or a carryover, but it cannot allow both.
taxmap/pubs/p969-002.htm#en_us_publink1000204193

Employer Participation(p17)

rule
For the health FSA to maintain tax-qualified status, employers must comply with certain requirements that apply to cafeteria plans. For example, there are restrictions for plans that cover highly compensated employees and key employees. The plans must also comply with rules applicable to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, explain these requirements.