A Flexible Spending Account (FSA) is a pre-tax savings account that you can use to pay for eligible medical expenses.
How does the money move?
What happens at the end of the plan year, or when an employee leaves the company?
Pre-tax deductions are then taken from the employee’s payroll throughout the year to repay the employer for those upfront costs. Health FSA funds expire if they aren't used by the end of the plan year unless the company offers extension options such as rollover or grace period.
If your FSA is managed by Gusto, visit your Gusto Benefits Card Manager portal to review transactions, claims, and more. If your FSA is not managed by Gusto, add the benefit to take pre-tax deductions to payroll and manage the funds externally.
Any employee eligible to participate in health benefits with your company is eligible to participate in the Health FSA.
Owners taking owner’s draws and 2% or greater shareholders of an S Corporation are not eligible to participate in Health FSA benefits.
Health Flexible Spending Arrangements (includes limited-purpose FSAs)
Maximum Annual Limit
Your Health FSA can be spent on eligible medical, dental, vision, and pharmacy expenses incurred during your Health FSA policy year. For example, if your Health FSA is active from 1/1/22-12/31/22 you cannot pay for services rendered in 2021.
To learn more about what specifically is eligible, here are a few more resources:
Keep in mind that if you're enrolled in a Limited Purpose FSA, you're can only use your funds for eligible dental and vision expenses. Medical and pharmacy expenses will not be allowed.
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A General Purpose Flexible Spending Account (GPFSA) will cover all eligible medical, dental, vision, & pharmacy expenses while a Limited Purpose FSA (LPFSA) will only cover eligible dental and vision expenses.
If you or your spouse expect to make active contributions into a Health Savings Account (click here for info on FSA vs. HSA) during your Health FSA policy year, you are only eligible for an LPFSA. When you have both types of savings accounts, you can use the HSA on medical expenses and the LPFSA for your dental and vision expenses.
If your health FSA is managed by Gusto, sign into your Gusto account and navigate to the Benefits tab where you will find details about the type of FSA account you have.
Check out this chart for a quick glance at what your FSA will cover:
General purpose FSA
Limited purpose FSA
Eligible medical expenses
Eligible vision expenses
Eligible dental expenses
Eligible pharmacy expenses
Note: Before trying to use your health FSA for your expenses, make sure to confirm which type of FSA you have so that you don’t have any issues with your claims down the line.
For more information about eligible expenses, visit this list from the IRS.
If you offer an FSA through a third party, you can set up payroll deductions for your enrolled employees.
Non-discrimination testing is a method you can use to make sure your benefits don’t favor highly compensated or key employees. For Flexible Spending Accounts (FSAs), a common test to use is the key employee concentration test. For Dependent Care Flexible Spending Accounts (DCFSA), both the key employee concentration test and the average benefits test are commonly used. You are encouraged to check with your tax expert and/or legal counsel to confirm which tests are necessary for your company.
We suggest that you run non-discrimination tests three times during your policy year to avoid any issues with the IRS:
After open enrollment. Results at this time will confirm if you’re likely to pass before your benefit policy year begins.
2-3 months before your next renewal. Results at this time will confirm if you’re likely to pass at the end of the policy year.
End of the policy year. Results at this time will confirm if you’ve passed for the past policy year.
If you have concerns about failing these tests throughout the policy year, you should check with your tax expert and/or legal counsel to determine which of the options below is best for you and then reach out to our team so we can help make changes to your benefits. Here’s what we may recommend:
The highly compensated employee(s) and/or key employees can lower or remove their contribution amount.
Other non-highly compensated employees can enroll, which could make the balance of participation more equally distributed across employees.
If your company fails the test at the end of the policy year, you may need to change some or all contributions to be post-tax, meaning those employees would pay taxes on their benefit contributions and employers would owe payroll taxes in association with those contributions.
Key employee concentration testing
The key employee concentration test requires that, of your employees’ total annual benefit amount, 25% or less of this amount comes from your key employees’ benefit totals. The total annual benefit amount includes pre-tax premiums of all lines of coverage, such as medical, dental, and vision, for both employees and dependents. If none of your company’s key employees opt in to the Health FSA, your company passes this test automatically.
If key employees account for greater than 25% of the total annual benefit amount, you are likely to fail the key employee concentration test at the end of your policy year
A key employee, is defined by the IRS as:
An officer having an annual pay of more than $175,000, OR
An employee or officer who for the length of the policy year is either of the following:
A 5% or greater owner of the business, OR
A 1%-4.99% owner of the business whose annual pay is more than $150,000.
Average benefits testing
The average benefits test applies in a variety of situations, but for Gusto customers it’s especially important for DCFSAs. This test requires that the average election amount for the DCFSA of non-highly compensated employees be at least 55% of the average contribution amount for the DCFSA of highly compensated employees.
It can be difficult to predict whether your company may pass or fail this test until open enrollment is over, as it is based solely on your employees’ choice to opt into (or out of) the Dependent Care FSA. It can also be difficult to predict throughout the duration of your policy year, as any new hires opting in (or terminated employees losing this benefit), can also affect your pass/fail result at the end of your policy year.
A highly compensated employee, as defined by the IRS, is identified as an employee:
Who owns more than 5% of the outstanding stock or total voting power of a corporation or 5% of capital profits interest if not a corporation at any time during the policy year, OR
For the preceding year, received >$120,000 in compensation OR
For the preceding year, was among the top 20% of employees in terms of compensation paid.
If everyone at your company owns more that 5% of the company and/or the majority of the team earns more than $120k, the DCFSA may not be the best benefit for your company.
Employees who satisfy the following criteria do not count toward the top-paid group:
Have not completed 6 months of service, OR
Normally work less than 17.5 hours per week, OR
Normally work not more than 6 months during any year, OR
Are under 21 years of age.
Note: This article is for general and educational reference only and is accurate as of April 1, 2019. Since IRS laws are complex and change frequently, we'd recommend working with a tax professional to perform non-discrimination testing.
Here is some additional information on the specific IRS regulations pertaining to non-discrimination testing:
26 U.S. Code § 125. Cafeteria plans
26 U.S. Code § 105. Amounts received under accident and health plans
26 U.S. Code § 129. Dependent care assistance programs
Employers are not required to offer the Special COVID-19 Enrollment Opportunity to their benefits-eligible employees—this is a flexible offering.
If your company offers a Flexible Spending Account (FSA), Dependent Care FSA, or Commuter benefits through Gusto, we'll email a disbursement report to your benefits administrator on the first of every month.
A disbursement report is the list of all enrolled employees' approved claims and card transactions from the previous month. This report will help you reconcile the MBI/Med-I-Bank debits on your company’s bank account.
If you want the report at a different frequency, need a one-off report, or would like a report with other information, please reach out to our team and we can assist.
A Health FSA is terminated on the last day of employment.
Runout period: A dismissed employee has 90 days from the last day of employment to submit claims for any eligible services rendered during the policy period. The policy period starts on the effective date of the FSA and ends on the last day of employment. For example, if your last day of work is November 1st, you have until January 30th to submit claims. Those claims must be for eligible expenses that you incurred during the policy period and on or before November 1st.
After the 90-day runout period, any remaining funds left in your account are forfeited to your previous employer.
You can see your last day to submit claims in your Gusto Benefits Card Manager: click into your Health FSA and look at the “Deadlines” section.
If you didn’t register for your Gusto Benefits Card Manager account during your employment, please reach out to [email protected] for your sign-in credentials.
The annual amount you chose to contribute during your enrollment is locked in for the remainder of the company’s policy year. Health FSA elections cannot be changed unless you experience a qualifying life event.
If you've experienced a qualifying life event and think you're eligible to make changes to your Health FSA contribution amount, please reach out [email protected] for help.
Keep in mind that if you want to lower your contribution amount, it can only be lowered up to the amount that has already been used or contributed, whichever is larger.