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What's an FSA?
A Flexible Spending Account (FSA) is a U.S. based employee benefit that allows employees to use pre-tax dollars to pay for out-of-pocket health insurance or dependent care expenses. We currently offer two types of FSAs: Healthcare and Dependent Care FSA.
With an FSA, an employee enrolls during the open enrollment period and elects how much they'd like to set aside pre-tax for the year. The total amount then gets broken up and deducted evenly from each paycheck for the remainder of the year. Employees can then use these funds for different IRS approved health care expenses. Employees do not have to be enrolled in a health plan to take advantage of the FSA.
How does a Healthcare FSA work?
Healthcare FSA can cover medical, dental or vision expenses that employees would otherwise pay for out-of-pocket, including co-pays and deductibles. Health insurance premiums are not an eligible expense. For a full list of qualified expenses please visit IRS Publication 502.
There’s a maximum limit from the IRS on the maximum amount an employee can set aside pre-tax for Healthcare FSA.
For 2024, there’s a maximum limit of $3,200.
For 2025, there’s a maximum limit of $3,300.
Healthcare FSA funds are tied to an employer plan, that means even if an employee has already contributed to an FSA with a previous employer, employees are still eligible to contribute the maximum yearly limit at the new employer for the remainder of the year. Employees can elect to participate in an FSA during open enrollment and must select a contribution amount at that time. They cannot make any changes or opt-out of the FSA later in the year.
How does a Dependent Care FSA work?
A Dependent Care FSA can reimburse employees for the work-related cost of care for a qualifying dependent. For a full list of qualified expenses, please visit IRS Publication 503.
A qualifying dependent is broadly defined as:
- A tax dependent of the employee who is under age 13, or
- Any other tax dependent, such as an elderly parent, who is physically or mentally incapable of self-care and has the same principal residence as the employee
- A spouse who is physically or mentally incapable of self-care and has the same principal residence as the employee
To qualify for a Dependent Care FSA, employees must be “gainfully employed”. Gainful employment usually means working or looking for work. If they are single, they may be reimbursed for expenses incurred due to gainful employment. If they are married, generally, both the employee and their spouse must be gainfully employed or looking for work to be reimbursed for expenses. One spouse is treated as working during any month he or she is a full-time student or is not physically or mentally able to care for himself or herself. Qualified work can be for others or in your own business or partnership. It can be either full time or part time.
For 2024 & 2025, employees may contribute up to $5,000 per year if they are married and filing a joint return, head of household, or if they are a single parent. For employees that are married and filing separately, they may contribute up to $2,500 per year per parent.
Can a Healthcare FSA cover healthcare expenses for my employees' dependents?
Yes, Healthcare FSA can cover expenses by qualifying dependents, even if they are not currently covered in the employer-sponsored health insurance plan. Qualifying dependents include:
- The employee's spouse
- Their qualifying child
- Their qualifying relative
When can my employees access the funds?
For the Healthcare FSA, all funds selected will be immediately available to employees on day 1 and do not need to wait to accrue the funds. For example, if your employee enrolls on January 1st and elects to defer $500 in total for the year to their FSA, they could spend all $500 on the first day the plan is effective. FSA deferrals will then continue to be spread out for the rest of the year.
For Dependent Care FSA, employees can only use funds as they contribute them into their account. For example, an employee elected to defer $2,400 across 24 pay periods, after the first pay period, they will only have $100 (or $2,400/24) available to use.
Can my employees change their FSA contribution amount at any time?
Typically, no. FSA contribution amounts can not be decreased or increased after the account's effective date unless certain exceptions apply. Changes may be allowed depending on a qualifying life event, but certain restrictions apply to what changes can and cannot be made.
During what dates is the FSA effective?
All Justworks plans run on a calendar year, beginning on January 1st and ending on December 31st. If employees sign up for a plan mid-year, they can submit claims for bills incurred from the effective date through December 31.
For example, an employee is hired on June 9th and has an effective date of July 1st for their medical and FSA benefits. The employee can submit claims for any bills incurred between July 1st and December 31st of that year.
The effective month is designated by the company and must always be the 1st of the month. All plans end on December 31st regardless of when they started.
When do FSA funds expire? Do they roll over if employees don’t use them by December 31st?
All FSA funds expire on December 31st for active and benefits eligible U.S. based employees. Justworks' FSA runs on a calendar year (1/1 - 12/31), regardless of when you or your company join. Funds do not rollover and unused funds on December 31st will be forfeited.
Be mindful of the IRS' "Use it or lose it" rule - if employees contribute more funds to their FSA than they are able to spend during the plan year, then they will forfeit any unused FSA balance. However, employees have a run-out period until March 31st to submit a claim for expenses incurred prior to December 31st.
Additionally, keep in mind that FSA funds will expire on the day that employees are separated. Even if employees have unused FSA funds, they may no longer use FSA funds for expenses incurred after their separation date. This is also the case if an employee’s employment status changes and leads to being ineligible for the benefit.
Please note: For members enrolled in a Flexible Spending Account (healthcare FSA and/or Dependent Care FSA) through Justworks in 2024 unused funds will not carry over into 2025. All unused funds, subject to any applicable run-out period, will be forfeited as described above.
If employees are on COBRA can they continue to use their FSA for qualified expenses?
Members who are on COBRA may be able to use FSA funds after separation. This is on a case by case basis and must adhere to the IRS rules. Employees should contact our Customer Service team to find out if they are able to use FSA funds. Employees will have 60 days from termination or the issuance date of their Medical COBRA packet, whichever is later, to request to continue utilizing their healthcare FSA through COBRA.
Please note, FSA funds are never eligible to be used for COBRA premiums.
If an employee changes jobs and starts contributing to the company FSA/DCFSA do their previous contributions count towards the cap? Who tracks and caps my employees contribution limit reset?
Healthcare FSA (FSA) funds are associated with the employer plan and not with the individual employee. This means that employees can contribute the full IRS amount with each new employer, regardless of what they may have contributed to their FSA at previous employers.Justworks will track and cap your employees contribution amount so that they do not go over the IRS limit for the year with their current account and election amount.
Dependent care FSA (DCFSA) funds are associated with the individual employee. Employees may only contribute the IRS max across all plans for a given plan year. Employees should take this into account when selecting their contribution amount during onboarding at a new company mid year.
You and your employees will be able to view the amounts they are contributing each month and the yearly amounts already contributed in Justworks under the benefits tab and FSA/DCFSA.
What happens to an employee’s funds when they are no longer employed?
Employees who are separated will be able to file claims for any expenses incurred prior to their separation date. Unlike medical benefits, FSA funds do not continue to the end of the month. Employees will have until the end of the 90 days from their separation date to file a claim for reimbursement for those qualified expenses.
What happens to an employee’s funds if my company leaves Justworks?
When a company terminates from Justworks, employee's FSA accounts also will be terminated. Employees will have 90 days from the termination of the Justworks plan to file a claim for reimbursement.
How long do my employees have to file a claim?
A claim can be submitted for up to 90 days after the FSA plan ends. Generally, this means employees have until 11:59 EST on March 31 of the following year to submit claims along with sufficient documentation for expenses incurred by December 31 for the FSA’s plan year.
However, if the FSA plan is terminated due to the employee's separation or the employee is no longer eligible, the employee has 90 days from that date to submit claims along with the necessary documentation. As a reminder, only expenses incurred up until the separation date are eligible for claims.
Can my employees have a Healthcare FSA if they have an HSA?
No, an employee cannot be actively enrolled in both a Healthcare FSA and a HSA. However, they can have a Dependent Care FSA with a HSA.
Disclaimer
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.