[1] One significant disadvantage to using an FSA is that funds not used by the end of the plan year are forfeited to the employer, known as the "use it or lose it" rule.
[3][4] The most common type of FSA is used to pay for medical and dental expenses not paid for by insurance, usually deductibles, copayments, and coinsurance for the employee's health plan.
Patient Protection and Affordable Care Act amended Section 125[7] such that FSAs may not allow employees to choose an annual election in excess of a limit determined by the Internal Revenue Service.
Pharmacies and grocery stores who choose to accept the debit card as payment must disallow transactions at point of sale if the participant attempts to pay for items that are not eligible under an FSA.
In addition, employers still must require employees to provide itemized receipts for all expenses charged to the debit card.
The IRS allows employers to waive this requirement when an individual uses the debit card at a pharmacy or grocery store that complies with the above procedure.
The IRS also allows employers to waive this requirement when the amount charged to the debit card is a multiple of a co-pay of the employee's group health insurance plan.
In most cases, the FSA administering firm will prefer actual insurance Explanations of Benefits (EOBs) clearly representing the patient portion of any medical expense, over other, more vague documentation.
Therefore, if the employee experiences a qualifying event during the first period, the entire amount of the annual contribution can be claimed against the FSA benefits.
The amount the employer loses due to pre-funding may eventually be partially, totally, or more than made up by employees that do not spend all of the money in their FSA account by the end of the plan year and grace period (see above).
[citation needed] Another FSA feature that was introduced in 2003, is the ability to pay for over-the-counter (OTC) drugs and medical items.
[22] In addition to substantially expanding the range of "FSA-eligible" purchases, adding OTC items made it easier to "spend down" medical FSAs at year-end to avoid the "use it or lose it" rule.
However, substantiation has again become an issue; generally, OTC purchases require either manual claims or, for FSA debit cards, submission of receipts after the fact.
developed inventory information approval system (IIAS), separates eligible and ineligible items at the point-of-sale and provides for automatic debit-card substantiation.
[25] The Special Interest Group for IIAS Standards (SIG-IS) maintains this eligibility list and updates it on a monthly basis.
According to section 9003(c) of the Patient Protection and Affordable Care Act, as of January 1, 2011, drugs needed to be prescribed to be reimbursable.
For example, if a single person elects to withhold $5,000 for child care expenses and marries a non-working spouse, the $5,000 would become taxable.
[citation needed] Also, the annual contribution amount must remain the same throughout the year unless certain qualifying events occur, such as the birth of a child or death of a spouse.
[32][2] Employers in California that sponsor flexible spending accounts must notify participants of any "deadline to withdraw funds before the end of the plan year.
[35] Employers must provide the required notice in at least two methods (email, telephone, text message, postal mail, and in-person), only one of which may be electronic.
[37] Section 134 of the Revenue Act of 1978 gave tax-favorable treatment to flexible spending accounts for medical expenses.
[40][41] In 1997 and 1998, the Internal Revenue Service detailed circumstances when an employee could make changes to an annual election in a flexible spending account.
[42] In 2000, employers began to issue debit cards to participating employees to make it easier to access flexible spending account funds.
[43] In September 2003, the Internal Revenue Service issued a ruling saying that certain over-the-counter medical expenses could be covered under flexible spending account plans.
[44] Effective January 1, 2013, the Patient Protection and Affordable Care Act ((PPACA) essentially[further explanation needed] required flexible spending accounts to limit employees' annual elections to no more than $2,500, with small increases each year based on inflation.
[47] Due to the COVID-19 pandemic, between January 1 and December 31, 2020, the Internal Revenue Service allows a health flexible spending account plan and a dependent care flexible spending account plan to allow employees to enroll mid-year, revoke an existing election on a prospective basis, or replace an existing election on a prospective basis.
[48] In response to Executive Order 13877, the Internal Revenue Service said that a health flexible spending account plan may increase the unused carryover amounts from $500 to a maximum of $550.