Risks of a Health FSA (Flexible Spending Account)

An Health FSA (health flexible spending account) can be great!  You can pay for health care costs pre-tax, which is an automatic savings of around 20-50% depending on your tax bracket / income.  However, as an employer, there are risks.  The primary one is the Uniform Coverage Rule.  Essentially, you can be left “holding the bag” if an employee uses their FSA funds then leaves before you can collect an appropriate amount via payroll deductions.  Here is the scenario posed in a Q&A format:

QUESTION: For 2024, an employee elected $3,000 of health FSA coverage, which is funded solely through employee salary reductions. The employee has already incurred medical expenses equal to this amount and wants to be reimbursed for the expenses now, even though she has only made health FSA salary reductions of $200 to date. Do we have to reimburse all of these expenses right away, or can we limit reimbursements to the amount our employee has already contributed and ask her to resubmit the remaining expenses as additional contributions are made?

ANSWER: Your employee must be reimbursed for all of her expenses now. That’s because IRS requirements for health FSAs include a “uniform coverage” rule under which the maximum amount of reimbursement must be available at all times during the plan year (or other period of coverage). Reimbursement cannot be restricted to the amount of the employee’s contributions.

The uniform coverage rule also prohibits accelerating an employee’s salary reductions based on health FSA claims submitted or paid. Note that the uniform coverage rule does not apply to Dependent care or Transportation pre-tax accounts, so reimbursements under those plans can be limited to the amount that has been contributed, less expenses already reimbursed.