Can an employee participate in the FSA if they declined their employer’s medical insurance?

October 23, 2023
Can an employee participate in the FSA if he declined medical insurance because they are on their spouse’s plan?

According to the IRS, there’s no law prohibiting an employee from participating in a Flexible Spending Account if they’re not on their company’s health insurance plan.

FSA eligibility

As the IRS notes, FSAs are employer-sponsored benefit plans. As an employer, you may choose to offer this in conjunction with other provided benefits (such as your company’s chosen medical insurance plan) or not. You have the flexibility to offer different combinations of benefits when designing the employee’s plan. Employees who do not choose to enroll in your company’s health insurance (for example, if an employee chooses to be on their spouse’s insurance plan instead) can still sign up for the FSA without insurance.

Why would employers choose to offer FSA alongside other benefits?

Employers are not required to offer flexible spending accounts, but it may just be in their best interest. While it's always wise for employers to talk to an HR advisor before changing benefits offerings, here are some of the ways adding FSAs can be beneficial:

  • Tax savings for both employers and employees. Contributions made by employees to their FSAs are exempt from payroll taxes, which means employers can save on their portion of FICA (Social Security and Medicare) taxes. FSAs may also provide a tax benefit for employees, too. Essentially, employees set aside money on a pre-tax basis for qualified expenses. This means they reduce their taxable income and may in turn reduce their tax liability too..
  • Better benefits package. Offering an FSA can make a benefits package more competitive, helping to attract and retain top talent potentially without significantly increasing the employer's benefits costs.
  • Employee Cash flow management. For health care FSAs, employers are required to have to provide access to the full annual election amount to employees at the start of the plan year, but they recover these funds throughout the year with each payroll deduction.
  • Helps employees' budgeting and financial wellness. With an FSA, employees may better anticipate and budget for medical and dependent care expenses, helping to reduce the potential for unexpected financial hardship related to these expenses.
  • Flexibility. Employers can choose to contribute to employees' FSAs, but they don't have to. This flexibility allows employers to design an FSA benefit that aligns with their financial capabilities and goals.

Why should an employee participate in the FSA if they declined medical insurance in favor of a spouse's plan?

Can you have an FSA without a medical plan through your employer? We've learned that it's possible. But why would you choose this option? Here are some reasons:

  • Tax savings. The most significant advantage of an FSA is the potential tax savings. Contributions to an FSA are made with pre-tax dollars, reducing your taxable income. This may lead to significant tax savings over the course of a year.
  • Out-of-pocket costs. Even if covered under a spouse's plan, the employee will likely still encounter out-of-pocket medical expenses. FSA funds can be used to pay for eligible expenses. Most commonly, employees spend FSA funds on deductibles, copayments, prescription medications, and other qualified expenses not covered by the insurance. But the wide range of uses for these funds might not be immediately obvious. You may also use these funds for vision expenses, chiropractic care, orthodontics and dental expenses, fertility treatments, blood sugar test kits, diagnostic devices, medical equipment, and over-the-counter medicines.
  • Dependent Care FSA. If the employer offers a Dependent Care FSA, you can use it to set aside pre-tax dollars for eligible care expenses that are required for an employee or spouse to work or search for employment. This is particularly beneficial for employees with children in daycare.
  • Flexibility. You can decide how much to contribute to the FSA based on anticipated medical expenses for the year, offering flexibility in managing health-related costs. FSAs can be a part of a broader financial strategy, helping employees manage and plan for health and dependent care costs more effectively. For a health care FSA, the entire annual election amount is available at the beginning of the benefits plan year. So, for example, even if an employee elects to contribute $2,400 to a health care FSA over the course of the year ($200/month), the full $2,400 is available right away, which can be useful for large upfront medical expenses. Ultimately, a healthcare FSA can help you save money and have funds available when you need them. Dependent care FSA funds are not available until they are contributed to the FSA.
  • Carryover or grace period. Some FSAs now offer either a carryover option (where up to a certain amount can be carried into the next plan year) or a grace period (providing an extra 2.5 months to use the previous year's funds). This helps provide extra time to use up unused funds leftover from the prior year.

Can I Have an FSA Without Insurance?

Now that you have the full picture of whether you can enroll in an FSA without health insurance through your employer, you may have some other questions about benefits administration and health care. Check out these helpful resources through TriNet. And if you're an employer considering working with a PEO for HR outsourcing services and payroll processing, consider reaching out to learn more of what is offered by TriNet.

Helpful Links:

Using a Flexible Spending Account

HSA vs. FSA: An Expert Explains the Difference Between Health Savings and Flex Spending Accounts

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