A Little Publicized Fact About Your Health Care Spending Account - the Uniform Coverage Rule

A cafeteria plan of employee benefits (also referred to as a Section 125 plan) is a selection of benefits designed, in part, to help reduce an employee's taxable income. One of the benefits your employer may offer is a Health Care Spending Account (also called a Flexible Spending Account). If you opt to set one up, the annual amount of your election is deducted from your paycheck on a pre-tax basis, prorated over the course of your pay periods for the plan year in question. Say, if I set up a HCSA with an annual election amount of $2600, $100 will be deducted out of each of my paychecks (assuming 26 pay periods in the plan year) on a pretax basis. That $2600 can be used to pay for my medical or dental office visits (co-pays), pay for deductibles on my health insurance plans, and cover certain over-the-counter health supplies and medications.

What some employers may not divulge, however, is that the full amount of my HCSA election (the full $2600) is available for use immediately upon the start of the plan year. Example: Even though on February 1st I've only contributed $200 to my HCSA, I can have full use of the entire $2600 to pay for eligible expenses. Let's say I need some major dental work and my dental coverage only pays for 50% of the cost and I intend to pay for the other half through my HCSA. I have the work done on February 1st and my share of the cost is $1,000. Even though I've only contributed $200 to my HCSA thus far, I can file a claim and be reimbursed for the full $1,000 of my out of pocket expenses. AND, the next week I can quit my job, walk away with my $800 of "free" dental work, and it's perfectly legal. As a matter of fact, IRS regulations require the full amount of your HCSA be made available to you at the start of the plan year (It's called the Uniform Coverage Rule under IRS regulations) and prohibit an employer from requesting an employee pay back the funds. And employers know this. The situation which I just described is a little extreme and employers balance the likelihood of the extreme with the much greater tax benefit they and their employees receive in the form of reduced employer and employee income taxes. However it's a small but important fact which should be known by anyone enrolled in or considering enrollment in a HCSA.

Small Note: Be sure not to confuse your HCSA with your Dependent Care Spending Account. DCSAs are used to pay for childcare and fall under different IRS regulations. As a matter of fact, DCSAs are a 'use as you pay' account, meaning that you can only be reimbursed for dependent care up the the amount you have contributed thus far in the plan year.