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

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, health FSAs are employer-established 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 can provide a tax benefit for employees, too. Essentially, employees set aside money on a pre-tax basis for qualified medical or dependent care expenses. This means they reduce their taxable income and tax liability.
  • Better benefits package. Offering an FSA can make a benefits package more competitive, helping to attract and retain top talent without significantly increasing the employer's benefits costs.
  • Reduced health insurance costs. Employees who actively use FSAs may be less likely to use their health insurance for every medical expense, potentially reducing claim costs on employer-provided health plans.
  • Cash flow management. For health FSAs, employers often have to provide 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. This can assist in cash flow management.
  • Supports high deductible health plans. As many employers shift to HDHPs to reduce the cost of insurance premiums, FSAs can help employees manage out-of-pocket expenses, making HDHPs more manageable.
  • Helps employees' budgeting and financial wellness. With an FSA, employees can better anticipate and budget for medical and dependent care expenses, reducing the potential for unexpected financial hardship related to any healthcare 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 tax savings. Contributions to an FSA are made with pre-tax dollars, reducing your taxable income. This can 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 medical expenses not covered by the insurance. But the wide range of uses for these funds might not be immediately obvious. You can 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 child or adult dependent care expenses. This is particularly beneficial for employees with children in daycare or with elderly parents requiring assisted living or in-home care.
  • 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 Flexible Spending Account, the entire annual election amount is typically available at the beginning of the plan year. So, even if an employee elects to contribute $2,400 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.
  • 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 reduces the risk of losing unused funds at the end of the 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 partnering with a PEO to manage all things HR and payroll, consider the services and expertise 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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