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.

EXAMPLE:

• She signs up for a $3000 FSA benefit effective 1/1/2026
• She delivers the baby and uses that $3000 benefit to pay the hospital bill on 1/15/2026
• That $3000 is taken from PSEF bank account
• The Employer / Company recovers that money from Sara via payroll deductions ($3000 divided by 26 = $115.38 per paycheck).

• The Employer / Company has lost $2884.61 because $3000 was used to pay the hospital bill, and only one payroll deduction was collected from Sara.

• 1 deduction of $115.38 taken in early January and Missed 5 while on maternity leave
• That leaves 20 payroll deductions for the year
• Sara’s new deduction is $2884.61 divided by 20 = $144.30

• The FSA can allow up to $500 to “roll over” into the next year (THIS IS OPTIONAL and decided by the Employer / Company).
• The FSA plan can allow a “run out” period (let’s say until 2/1 of the next year). This allows Joe to go back and review ALL his medical spending from 2026, and use the FSA dollars.
• If Joe just forgets to do anything, he will lose any unused portions of his FSA election. The Company keeps that money and it is booked as “Other Income”.

• Employee’s $3000 FSA deduction is excluded from the FICA match
• $3000 * 7.65% = $229.50