Health Care Account Choices for Law Firms

Flexible Spending Arrangements (FSA)

An FSA is an account that a law firm can set up for its employees in which the employee contributes pre-tax earnings to the plan and then uses the money in the account to pay for qualified medical expenses. Under a typical arrangement, the FSA is funded through salary reduction. The money is then distributed from the account to reimburse the employee for his (or his dependents') medical expenses that are not covered by his health insurance. These distributions are not taxable to the employee. All employees are eligible regardless of their health insurance coverage status. It is important to note that law firm partners and law firm shareholders owning more than 2% in an S corporation are not considered employees for this purpose and consequently are not eligible to participate in a FSA. Qualified medical expenses are defined as disbursements that qualify as deductible medical expenses under Internal Revenue Code Section 213. This includes dental and vision care. The IRS has ruled that non-prescription medicine such as antacids, allergy medicine, pain reliever and cold medicine qualify. On the other hand, dietary supplements such as vitamins do not qualify.