Also known as a flexible spending account. A benefit program that reimburses employees for specified expenses (that is, amounts paid for medical care under Section 213(d) of the Internal Revenue Code (26 U.S.C. § 213(d)) for which reimbursement is not provided under a health plan (26 U.S.C. § 105(h)(6)). A health FSA can be established using a stand-alone plan or through a cafeteria plan (see Practice Note, Cafeteria Plans). Reimbursements are made with salary contributions that are allocated to the FSA on a pre-tax basis. This means that employee contributions to the FSA are deducted from pay before federal, state, or Social Security taxes. However, an employee cannot elect to make salary reduction contributions of more than $2,500 (adjusted for inflation) to a health FSA in a year. An insurance copayment is an example of an expense that is commonly reimbursed through a health FSA.

Under the Affordable Care Act (ACA), health FSAs could be used to reimburse over-the-counter (OTC) medicines or drugs only if they were purchased with a prescription, although insulin could be reimbursed without a prescription (see Practice Note, Reimbursement of Over-the-Counter Medicines and Drugs Under the ACA). However, these restrictions was removed under COVID-19-related legislation enacted in March 2020 (see Practice Note, COVID-19 Compliance for Health and Welfare Plans: OTC Drugs and Menstrual Care Products).

FSAs are not permitted to defer compensation. As a general rule, therefore, FSA contributions and benefits cannot be carried over to a later plan year. Under an exception to this rule, however, participants may use unused FSA funds for expenses incurred during a grace period of up to two months and 15 days after the end of the FSA's plan year.