Health Flexible Spending Account (Health FSA) Guide | March 2024

Employee Benefits

Health Flexible Spending Account (Health FSA) Guide | March 2024


A Health Flexible Spending Account (Health FSA) is an employer-sponsored health expense reimbursement account that can be funded on a pre-tax basis and used for qualified medical expenses of a participant and any eligible family members. Participants may receive qualified reimbursements from a health FSA on a tax-free basis. The maximum amount a participant may contribute to a health FSA is contingent upon the maximum health FSA contribution amount set by the Internal Revenue Service each year, which can be further limited by a health plan sponsor’s maximum permitted contribution amount.


As a self-funded medical reimbursement plan that provides medical care, health FSAs will be considered group health plans subject to ERISA—assuming the plan is maintained by the employer and no exemptions apply. Health FSAs maintained by governmental or church employers are exempt from ERISA. Health FSAs subject to ERISA are required to satisfy ERISA’s group health plan rules on claims procedures, Form 5500 filing requirements, plan document requirements, SPD/SMM distribution requirements, and plan asset requirements.


Under IRS rules, health FSA eligibility is generally extended only to common-law employees of the employer. Employers may incorporate further eligibility restrictions into their health plan. As a practical matter, they often limit health FSA eligibility only to employees also eligible to participate in the employer’s major medical plan if the health FSA provides more than limited-scope dental/vision benefits. The primary reason eligibility is restricted only to employees eligible for the employer’s major medical plan is to ensure the health FSA qualifies as an excepted benefit (discussed in more detail below).

Individuals not considered common-law employees for Section 125 cafeteria plan purposes are generally ineligible to participate in a health FSA. This includes sole proprietors, more-than-2% shareholders in a Subchapter S corporation (and family members), partners, and LLC members.

Regulatory and Legislative Strategy Group