A health Flexible Spending Arrangement (FSA) is an employer-established benefit plan used to reimburse employees for medical expenses. The FSA is funded by voluntary employee contributions and optionally by employer contributions. The contributions aren't included in income, and the reimbursements are tax-free if used for qualified health expenses.
FSAs potentially impact the employee's individual tax return in three ways:
- Reimbursements not used for qualified health expenses are taxable. (Qualified health expenses are defined in Publication 502, Medical and Dental Expenses.) Include the amount of FSA reimbursements not used for qualified health expenses in Other Income on Schedule 1 (Form 1040).
- Qualified health expenses that have been reimbursed by the FSA should not be included in medical and dental expenses on Schedule A.
- Reservists ordered or called to active duty can take a distribution of FSA funds if the plan allows it. The qualified reservist distribution will be included in W-2 wages and is subject to employment taxes.