Health care Flexible Spending Accounts (FSAs) are employer-established benefit plans to reimburse employees for specified health care expenses as they are incurred. FSAs can be used for unreimbursed medical expenses, and contributions to FSAs have tax advantages. However, FSA contributions are generally forfeited if not used by the end of the year, although employers may extend the deadline for using unspent balances up to 2½ months after the end of the plan year (i.e., March 15 for most plans). It also includes a discussion of the changes made to FSAs by the Patient Protection and Affordable Care Act (ACA). With respect to health care FSAs,
the maximum amount of reimbursement (reduced by any benefits paid for covered expenses) must be available throughout the coverage period; coverage periods generally must be 12 months (to prevent employees from contributing just when they anticipate having expenses); reimbursements must be only for medical expenses allowable as deductions under Section 213 of the Code; claims must be substantiated by an independent third party; expenses must be incurred during the period of coverage; after year-end forfeitures, any "experience gains" (the excess of total plan contributions and earnings over total reimbursements and other costs) may at the employer's discretion be returned to participants or used to reduce future contributions, provided individual refunds are not based on participants' claims; and health care FSAs must exhibit the risk-shifting and risk-distribution characteristics of insurance. According to the BLS survey, 39% of all workers in 2010 had access to a health care flexible spending account. When viewed by firm size, 56% of workers in firms with more than 100 workers had access to one. The accounts were not as common for workers in small businesses. In establishments with fewer than 100 employees, 20% of the workers had access to a health FSA. As of September 2008, there were about 240,000 federal health care FSAs. According to the Mercer Survey, 37% of employees offered an FSA chose to participate in 2009. The average annual contribution was $1,420. The IRS imposes no specific dollar limit on health care FSA contributions, though plans typically have a dollar or percentage maximum for elective contributions made through salary reductions. Beginning in 2013, contributions to FSAs will be limited to $2,500, and adjusted for inflation in subsequent years. However, beginning in 2011, over-the-counter medications (except those prescribed by a physician) are no longer considered a qualified medical expense. Employers are permitted but not required to allow these withdrawals. The Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ) provided that individuals may make limited, one-time rollovers from balances in their FSAs to Health Savings Accounts (HSAs). A federal health care FSA is also available to federal employees, though not to annuitants. Recent Legislative Activity

On June 7, 2012, the House passed H.R. 436 , the Health Care Cost Reduction Act of 2012, which would allow up to $500 of unused balances in health FSAs to be distributed back to the account holder after the plan year ends and to allow over-the-counter prescriptions to be a qualified medical expense (thus repealing the provision introduced in ACA). The bill has been sent to the Senate for its consideration. In the Senate, two similar bills have been referred to the Senate Finance Committee.
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).
According to the Bureau of Labor Statistics National Compensation Survey, 39% of all workers in 2010 had access to a health care flexible spending account. When viewed by firm size, 56% 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, 20% of the workers could choose to participate in an FSA. Not all employees offered an FSA chose to participate. According to a 2010 Mercer Survey, 37% of employees offered an FSA chose to participate and the average annual contribution was $1,420. 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.
The Patient Protection and Affordable Care Act (ACA; P.L. 111-148), some provisions of which are amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), modified the definition of qualified medical expenses to exclude over-the-counter prescriptions (not prescribed by a physician) as a qualified expense effective 2011. In addition, ACA limits the annual FSA contributions to $2,500 beginning in 2013.
On June 7, 2012, the House passed H.R. 436, the Health Care Cost Reduction Act of 2012, which would allow up to $500 of unused balances in health FSAs to be distributed back to the account holder after the plan year ends and to allow over-the-counter prescriptions to be a qualified medical expense (thus repealing the provision introduced in ACA). The bill has been sent to the Senate for its consideration. Similar bills in the Senate have been referred to the Senate Finance Committee (S. 1368 and S. 1404). This report discusses these bills in greater detail.
This report will be updated for new data or as legislative activity occurs.