Flexible Spending Deductions

Under Section 125 of the IRS Code, eligible employees can allocate pre-tax dollars to a fund to pay for medical and dental expenses not reimbursed by insurance.  The pre-tax dollars are then deducted from the employee’s check in the amount requested by the employee based on his/her estimate to cover non-reimbursed expenses.  The money is deposited into an account where it remains until the employee files a claim for a non-reimbursed expenses.

Maximum contribution amounts per plan year may be established.  Medical expense spending accounts must provide coverage for a period of at least 12 months, but exceptions are provided for short first plan years or changes in plan years.

Once the service has been rendered, under the medical reimbursement account regulations, the employee can be reimbursed for more than is in his/her account, provided it does not exceed the total annual election amount.  Pre-tax dollars will continue to be deducted from the employee’s pay.

Upon termination of employment, the medical flexible spending account may be continued on a post-tax basis under COBRA.

The IRS also allows an employee’s salary to be reduced, on a pre-tax basis, for dependent care reimbursements.  Eligible expenses are non-medical expenses that enable the employee to be gainfully employed and ensure a ”qualifying” dependent's well-being and protection.

A ”qualifying” dependent is any individual includes:

• a dependent who is under the age of 13 and with respect to whom the employee is entitled to a tax exemption;

• any adult or child dependent or spouse who is physically or mentally incapable of self-care.

The maximum amount an employee can receive in dependent care reimbursement is the lesser of the employee’s or his/her spouse’s earned income or $5000 ($2500 for a married individual filing a separate tax return).  The combined reimbursements of the employee and his/her spouse cannot exceed these limits.

To setup Flexible Spending Accounts, two separate benefit categories need to be established to enable Flexible Spending Account processing for an employee.  One benefit is set up to "reduce" the employee's salary.  A separate benefit is set up to use a negative deduction to "reimburse" the money back to the employee. Using these benefit categories, two different benefit types are set up on the Deduction Type (DEDT) page or, if the site is an Employee Benefits site, Employee Fringe Benefit Type (BENT) page: one using a salary reduction category; and one using a reimbursement category.  The Benefit Type used for reducing the employee's salary is set up as a goal-oriented benefit on DEDT/BENT.  The Benefit Type used for reimbursing the employee is set up as a non-goal-oriented benefit on DEDT/BENT.

The Annual Cap field on the Deduction Plan (DPLN) page, or Employee Fringe Benefits Plan (BENP) page, should be set to any salary reduction limits as defined by Section 125 of the Internal Revenue Code.  There is no legal limit for a medical Flexible Spending Account; however, organizations may choose to implement a cap.

An example of how these two deductions interact: an employee is enrolled into a benefit with a Benefit Type of FSAMD and Benefit Plan of PLAN1, which will remove $100 per week from the employee's pre-tax salary.  This employee then submits a reimbursement claim against his/her Flexible Spending Account.  The claim uses the non-goal-oriented Benefit Type of FSAM2 and Benefit Plan of PLAN2 to create a negative deduction.  This will increase the salary of the employee thus "reimbursing" the money to the employee.

To accomplish the flexible spending account functionality, a link must be established between the Benefit Type and Plan used for reducing the employee's salary and the Benefit Type and Plan used for reimbursing the employee.  The Reimbursement Category per Plan Year (PREM) page validates the appropriate reimbursement and salary reduction categories for each plan year by linking the Reimbursement Category to the Salary Reduction Category.

The salary reduction category is setup with a user-defined plan year start date and end date.  For example, plan year 2006 could have an 01/01/2006 start date and a 12/31/2006 end date. The Salary Reduction Plan Year (SPLY) reference page should be set up such that it is equal to or greater than the To date for the pay cycle set up on the Pay Cycle (CYCL) page. If there are multiple pay cycles set up at any site, for example: Pay Cycle1 & Pay Cycle 2 then the To date on SPLY should be equal to or greater than the later of the pay period end date of both pay cycles.

For example: for plan year 2016

Pay Cycle1:

1st Pay Cycle: 12/19/2015 – 01/01/2016

26th Pay Cycle: 12/03/2015 - 12/16/2016

Pay Cycle1:

1st Pay Cycle: 12/26/2015 – 01/08/2016

26th Pay Cycle: 12/10/2016- 12/23/2016

SPLY setup:

From: From date can be any date between 12/26/2015 to 01/01/2016 (overlapping dates of first pay period of both pay cycles).

To: This date should be equal to or greater than 12/23/2016 (equal to or greater than the later of the last pay period end date of both the pay cycles for that plan year).

The reimbursement category is setup with plan year start date and end date that is defined by the employer.  For example, if the plan year begins at the beginning of the calendar year and the employer allows reimbursements to be submitted up to 90 days after the plan year ends, then plan year 2006 would have a start date of 01/01/2006 and an end date of 03/31/2007.  The Salary Reduction Plan Year (SPLY) and the Reimbursement Plan Year (RPLY) tables define the plan year for the salary reduction category and the reimbursement category respectively.

A Reimbursement Usage indicator on Reimbursement Category per Plan Year (PREM) is used to classify the Flexible Spending Account as either a medical reimbursement account or a dependent care reimbursement account.  The medical reimbursement account acts like an insurance plan and is subject to the "risk-of-loss rule."  This means that an employee may make a reimbursement claim against the Flexible Spending Account even though there may not be sufficient funds established yet.  At this point in time the employer runs the risk of the employee terminating service and losing the money that has been reimbursed.  For example, an employee has $200 worth of salary reductions put into their Flexible Spending Account for January.  In February, the employee submits a claim for $1000 and at the end of the month the employee quits. Now the employer has reimbursed the employee $800 over what the employee contributed to the Flexible Spending Account.  

The dependent care option for a Flexible Spending Account does not work exactly the same as the medical option.  For dependent care, the employee can only be reimbursed up to the amount that they have currently contributed, unless the employer specifies otherwise.  The option of disallowing these "negative balances" is provided through the use of the Allow Negative Balance indicator on PREM.

If the Allow Negative Balance on PREM is selected, then the employee may be reimbursed for more than they have currently contributed.  However, the employee may never be reimbursed for more than what they have specified for their Annual Goal Amount.  If the Allow Negative Balance option on PREM is not selected, then the employee may only be reimbursed up to the amount that has been contributed for the year-to-date.  Although the Allow Negative Balance indicator must be selected for medical Flexible Spending Accounts, the employer can determine whether they want to incur "risk-of-loss” liability for dependent care reimbursements as well.  That is, each site can determine, for dependent care FSAs, whether employees can be reimbursed more than they have contributed (up to the goal amount) even though they are not required to do so by law.

To assign an employee to the Flexible Spending Account, they will be enrolled in the same manner as a regular benefit on the Miscellaneous Deductions (MISC) page, or the Benefits Enrollment (ENRL) page if site uses the Employee Benefits subsystem.  The Flexible Spending Account will be defined with an Effective Date for the beginning of the plan year and an Expiration Date for the end of the plan year.  As each new plan year begins, updates are required to MISC or ENRL with a new Goal Amount for a new set of effective dates.  An entry does not have to exist on the PREM page in order to enroll the employee on MISC or ENRL.  However, a PREM entry does need to exist in order for the employee to be reimbursed from the Flexible Spending Account.  The Number of Cycles on the MISC and ENRL pages enables the system to automatically calculate the Override Amount/Employee Amount field based on the indicated goal amount and number of pay cycles entered. This field is optional, but useful for other goal-oriented deductions.

Reimbursements may be requested on the Reimbursement Account Claim (REIM) transaction. In order to process a reimbursement, the Claim Amount requested by the employee, Service Date, Plan Year, Process Date, and Reimbursement Type and Plan must be entered.  (Note: the type and plan that are used for the Flexible Spending Account reimbursement must a Reimbursement Category from PREM.)  Upon submitting, the REIM creates an entry on the Pending Deduction (PDED) page to be processed during a subsequent Gross-to-Net run.  The Supplemental Pay indicator on REIM determines if the pending deduction is to be picked up during a regular or supplemental Gross-to-Net.  The pending deduction is negative, thus having a positive effect on the employee's salary.  An employee deduction parameter can also be created if an offset amount exists.

The pending deduction amount is determined by the Reimbursement Amount on REIM, not the Claim Amount.  The Reimbursement Amount is calculated based upon Claim Amount, the amount currently in the Flexible Spending Account, any previous reimbursements to the Flexible Spending Account, any pending deductions for the Flexible Spending Account, any outstanding offset amounts and the Allow Negative Balance indicator on PREM.  To summarize, the Reimbursement Amount will be the lesser of the Claim Amount or the Flexible Spending Account Goal Amount - the sum of any previously authorized Reimbursement Amounts (this includes, previous payments, pending deductions and deduction parameters created for offset amounts).

All, part, or none of the Claim Amount may be calculated as the Reimbursement Amount.  For example, an employee has $200 contributed to their dependent care Flexible Spending Account (Allow Negative Balance indicator is not checked).  They also have a pending deduction on PDED for $75 for this Flexible Spending Account.  The user then enters an REIM transaction for that employee with a Claim Amount of $150.  The Reimbursement Amount would then be calculated as $125 ($200 contributed - $75 pending = $125 available). For the amount that cannot be taken, an offset goal oriented deduction parameter entry should be created for the employee with the Goal Amount = the offset amount.  If the claim were for the employee's medical Flexible Spending Account (Allow Negative Balance is checked), then the entire $150 would have been reimbursed as long as the Goal Amount on MISC/ENRL was greater than $225.  However, if the Goal Amount on MISC/ENRL was $210, then the employee would only be reimbursed for $135 of the original $150 requested ($210 goal amount - $75 pending = $135 available).  Any part of the claim amount that exceeds the goal amount is noted on the REIM table but dropped for processing.  The Goal Amount will never be exceeded regardless of the Allow Negative Balance indicator.    

REIM table entries can be deleted until processed by Gross-To-Net.  If an REIM entry is deleted, then any corresponding pending deduction will be deleted.  In addition, any deduction parameters created for offset amounts related to the deleted REIM entry will need to have the offset amount subtracted from the goal amount of the reimbursement deduction.  Once processed, adjustment REIM transactions will need to be entered to correct balances.  The user may enter a negative number in the Claim Amount field to process adjustments.

If a check is canceled without replacement then the amounts will be backed out and the pending deduction will not be replaced.  The REIM record will have its check information cleared and the user must re-update the REIM transaction if they want to process that claim again.  If a check is canceled with replacement, then the pending deduction will remain on the database and the REIM record will keep the same check information.  Once a check has been processed, the check information is written to the REIM record and the user may not re-update that REIM transaction.  The record will be available for scanning, but if adjustments are needed then the user must enter another REIM transaction.

Once the reimbursement claim period is over, federal regulations dictate that any money left in the account will be forfeited.  It cannot be rolled over or cashed out.  To account for this, the user should assign a clearing fund on DPLN/BENP for the Benefit Plans used with their Flexible Spending Accounts.  Both the reimbursement Benefit Plan and the salary reduction Benefit Plan should use the same clearing fund.  After all claims have been made and processed, the user must manually adjust the clearing fund account by entering a Journal Voucher (JV) transaction in Advantage Financial.

After an employee terminates employment, they can continue to submit reimbursement claims from their flexible spending account.  Since flexible spending accounts can be set up to accept reimbursement claims that exceed the year-to-date contribution amount up to the goal amount (Allow Negative Balance indicator on PREM is selected), it is possible for a terminated employee to be reimbursed more than they have contributed.  Reimbursements that are submitted for terminated employees are restricted to the amount that they have contributed in the plan year for which the reimbursement is requested. The Site Specific Parameter (SPAR) entry, RESTRICTED REIMB EMPL STATUS, allows users to enter up to 10 inactive employment statuses (from the Employment Status [EMPS] table) in the Text Value field (for example, statuses that are used for terminated, retired, or otherwise inactive employees). To ensure that a terminated employee does not receive a reimbursement that exceeds the year-to-date contribution, the employee’s employment status is compared to the values listed in the RESTRICTED REIMB EMPL STATUS entry on SPAR.  If the employment status code is listed in this SPAR entry, then the employee’s Contribution To Goal amount for the FSA deduction is used to determine the reimbursement amount.  If the employment status code is not listed on the SPAR entry, then the employee’s Goal Amount is used to determine the reimbursement amount.  This automated process prevents the need to manually change the Goal Amount to equal the Contribution to Goal when an employee terminates.