Some Flex for You. Flexible Spending Account Rules for the Tax Professional

Flexible spending arrangements (aka flexible spending accounts or FSAs) operate under cafeteria plans that are established under IRC § 125. A health FSA is the most popular FSA, allowing funds contributed by the employee and/or employer (often as flex credits) to pay for or reimburse certain medical care expenses not otherwise covered under the individual's health plan. Generally, only expenses that are identified under IRC § 213(d) and are incurred by the employee or the employee's spouse or dependents are eligible expenses.

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Related Content

• Cafeteria Plan Design and Compliance (IRC § 125)
  Review the basics of cafeteria plans, under which an FSA can operate. A cafeteria plan is an employee welfare benefit program employers can use to help employees pay for certain expenses such as health insurance, dental insurance, life insurance, unreimbursed medical expenses, and dependent care services, with pre-tax dollars. These arrangements are governed by IRC § 125, which allows the value of cafeteria plan qualified benefits to be excluded from the gross income of participating employees. Employee contributions also avoid Social Security and Medicare withholding taxes.

• Section 125 Cafeteria Plan Rules Video
  Watch this practice video describing the requirements for cafeteria plans imposed by the Internal Revenue Code. The video focuses on the cafeteria plan election by employees to direct their pre-tax dollars to pay for cafeteria plan health and welfare benefits and how this operation avoids the "constructive receipt" tax rule.

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