United States 

Office of 

Personnel Management 

The Federal Government’s Human Resources Agency 

Retirement and Insurance Service 

Benefits Administration Letter
 

Number: 03-301	 Date: January 9, 2003 

Subject: Preliminary Information about Flexible Spending Accounts 

The Federal Flexible Benefits Plan (“FedFlex”) enables eligible employees to pay for benefits 

with pre-tax dollars. The initial FedFlex benefit, Premium Conversion, was implemented in 

October 2000. In calendar year 2003, we plan to enhance FedFlex to include a second pre-tax 

benefit called Flexible Spending Accounts (FSAs). We are currently in the process of procuring 

an FSA administrator. This letter provides agency payroll officials with preliminary information 

about FSAs, so that they may begin to plan for implementation. After we select an administrator 

and make some final policy decisions, we will issue additional guidelines on issues that are not 

addressed in this letter such as; the order of precedence, a possible lapse in coverage, periods of 

LWOP, insufficient funds, and transfers between agencies. 

FedFlex will offer two FSAs: 

o A Health Care FSA [HCFSA], through which employees can use pre-tax allotments to 

pay for certain health care expenses that are not reimbursed by any other source and not 

claimed on the participant’s income tax return. The actual amount an employee may set 

aside will not be known until the procurement is finalized, but will likely be in the range 

of $2-$3000 annual maximum amount. 

o A Dependent Care FSA [DCFSA], through which employees may use pre-tax allotments 

to pay for eligible dependent care expenses up to a maximum annual reimbursement of 

$5,000 ($2,500 if the employee is married and filing a separate income tax return). 

Section 125 of the Internal Revenue Code, allows employees to pay for certain health and 

dependent care expenses with pre-tax dollars. As with Premium Conversion, employees may 

choose to make a voluntary allotment from salary to their FSA account; participants do not pay 

employment taxes on these allotments . Employees who elect to participate set-aside an annual 

amount of salary to be contributed to their FSA. The employer will deduct these contributions 

from the employees’ pay throughout the plan year and remit them to the FSA administrator for 

Civil Service Federal Employees’ Federal Employees Federal Employees Long Term 

Retirement Group Life Health Benefits Retirement Care Insurance 

System Insurance Program Program System Program 
 

 

deposit into the employees’ FSA accounts. Employees can draw upon their FSA accounts for 

reimbursement as they incur eligible expenses. 

ELIGIBILITY 

Employees eligible for FEHB (even if not currently enrolled) will be able to elect a healthcare 

FSA to cover expenses not covered under their FEHB plan –deductibles, coinsurance and 

copayments, as well as services not generally covered such as dental care, orthodonture, etc. All 

Federal employees (including employees with temporary, seasonal and intermittent 

appointments) will be able to elect to participate in the dependent care FSA for eligible 

dependents. Employees will elect to contribute an amount, up to a maximum, to their FSA(s). 

As with premium conversion, non-Executive branch agencies may elect to adopt the amended 

FedFlex for their employees. Agencies that have already implemented their own FSAs may 

choose to adopt FedFlex FSAs for the plan year beginning January 1, 2004, or retain their own 

program. At the present time, annuitants (except for reemployed annuitants) are not eligible for 

coverage in either FedFlex FSA. 

USEFUL INFORMATION 

FSA Plan Year. The initial FSA plan year will be a “short plan year” that begins on July 1, 2003 

and ends on December 31, 2003. All subsequent plan years will encompass January 1 through 

December 31. 

Open Season. After the initial (short) plan year, employees will make elections to participate in 

one or both FSAs at the same time as the FEHB open season. 

Benefit Elections. Unlike Premium Conversion, participation in an FSA is not automatic; 

employees must make an election each and every year. Employees will make two “benefit 

elections” -- whether they wish coverage in one or both of the FedFlex FSAs and the annual 

amount they agree to have deducted from their pay during the plan year for deposit into their 

FSA accounts. The benefit elections are irrevocable once the plan year has begun, unless the 

employee experiences a qualifying “change in status” event. 

Use or Lose. Because of the tax advantages of FSAs, the IRS has strict guidelines for its use. 

One of these guidelines is commonly known as the "use it or lose it" rule. Put simply, if 

employees have not incurred enough eligible expenses during the plan year to equal the annual 

amount they have contributed to their FSA(s), they will lose the balance remaining in their 

account(s) when the plan year ends. 

OPM Web Site. We have developed a new section for information on FSAs on our web site. The 

address is www.opm.gov/insure/pretax. We encourage agencies to visit this site regularly, as we 

expect to update it frequently. 

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PRELIMINARY PAYROLL REQUIREMENTS INFORMATION 

As with the FLTCIP, OPM intends to place most of the responsibility for implementing and 

managing FSAs on the selected FSA administrator, rather than on agency payroll offices (APOs). 

 Thus, we will require the FSA administrator to develop linkages with all APOs, and adapt its 

processing systems to those of the APOs, paying special attention to those agencies with extra 

security requirements. We believe that much of the work involved in developing the linkages 

with agency payroll systems has already been accomplished by LTC Partners, and will share that 

information with the successful FSA administrator. 

Those agencies migrating to a consolidated payroll provider under the e-Payroll initiative must 

carefully consider their migration schedule in determining whether to make payroll system 

modifications to support FedFlex FSAs. Those agencies migrating before or shortly after July 

2003 may not make the investments necessary to modify their systems without prior OPM 

approval. 

Initial Opportunity To Participate. There will be an open enrollment period beginning in midMay 2003 for the initial plan year that will run from July 1 through December 31, 2003. During 

the open enrollment period, eligible employees will be able to elect to participate in one or both 

FSAs along with the amount of their annual contributions. The benefit elections will be effective 

on the first day of the first payroll period that begins on or after July 1, 2003 and that follows a 

pay period during any part of which the employee was in pay status. The benefit elections will 

terminate with the first pay period ending in January 2004. 

Subsequent Opportunity To Participate. After the initial plan year, employees will have an 

opportunity to make new FSA benefit elections during the FEHB Open Season. FSA benefit 

elections made during an FEHB Open Season will be effective with the first payroll period 

beginning after the following December 31. 

Eligible employees who did not have an opportunity to elect coverage during an open enrollment 

period may elect to participate immediately upon entry-on-duty. The FSA administrator will 

notify the APO of an employee’s election by means of its billing file (discussed below). 

Allotments. In order to participate in an FSA, contributions must come from an employee’s 

salary via an allotment. FSA allotments will be allotments to the employing agency that are then 

directed to a fund managed by the FSA administrator. As with premium conversion, the amount 

of employee contributions to FSAs will be allotted back to the employing agency. By July 2003, 

payroll systems must have the capacity to process two new allotments from pay – one for the 

healthcare FSA, and the second for the dependent care FSA. If an agency payroll system has 

allotment limitations, now is the time to expand it's capability. 

Enrollment. As with the FLTCIP, individuals will enroll directly with the FSA administrator to 

participate in one or both FSAs. 

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Communication of Payroll Office Identifier. Since enrollment will be handled directly by the 

FSA administrator, employees’ will need to know and input a payroll office identifier on their 

FSA enrollment applications, similar to the process used by LTC Partners. When an employee 

transfers between agencies, he/she must provide the FSA administrator the new payroll office 

identifier. We intend to leverage the payroll office identifier process established by LTC 

Partners; see http://www.ltcfeds.com/NASApp/ltc/do/payroll/payrollmain. 

Communication of FSA participation between agencies. Agencies use various methods to 

communicate information upon the transfer of an employee -- we are aware of the use of the SF 

75, the SF 1150, and a variety of internally developed forms and checklists. Regardless of the 

mechanism used, it is critical that the process provide the "gaining" office with the FSA status of 

the transferring employee; that is, whether the employee participated or did not participate in a 

HCFSA and / or DCFSA at the "losing" office. 

Billing for Contributions [“Billing File”]. Once an employee has applied for an FSA and has 

been determined to be eligible, the administrator will submit to the identified payroll provider, a 

billing file. The billing file will contain all information necessary for the APO to deduct FSA 

contributions. The administrator will calculate the amount of deductions based on the payroll 

cycle of the enrollees’ agency and provide it to the APO on the billing file; the APO will deduct 

the exact amount specified by the administrator. 

The FSA administrator will work with each APO to determine the most effective and efficient 

method and time frames to communicate this information. At a minimum, the billing file will 

contain the following information: 

�� Name of employee (last, first, middle initial) 

�� Social security number of employee 

�� Payroll office number (PON) 

�� Amount of deduction(s) 

�� Allotment amount 

�� Type of account 

�� Pay period date 

�� Codes, indicating whether it is an initial deduction, a change, or a cancellation . 

Remittance of Deductions and Associated Information [“Remittance File”]. As with the 

FLTCIP, allotments will be remitted directly to the FSA administrator, not to OPM. The APO 

will deduct the allotments specified in the billing file and remit them to the FSA administrator on 

the payroll paid date via electronics funds transfer, along with supporting information. The FSA 

administrator will work with each APO to determine the most effective method to remit 

deductions. At a minimum, the remittance file will contain the following information: 

�� Name of employee (last, first, middle initial) 

�� Social security number of employee 

�� Payroll office number (PON) 

�� Total amount remitted 

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�� Code, indicating reason for deductions not taken and date of event 

Terminating Deductions. Unless instructed otherwise by means of the billing file, APOs will 

make deductions for FSA contributions at the specified amount until the last day of the last pay 

period that begins in the calendar year. If the employee terminates employment with an entity 

that the APO payrolls or in the Federal service in general or is no longer occupying an eligible 

position, the APO will inform the FSA administrator by means of the remittance file. If the FSA 

administrator determines that employees have experienced a qualifying “change in status” that 

allows them to terminate coverage in an FSA, it will notify the APO by means of the billing file. 

Reemployed Annuitants. As with premium conversion, annuitants may not elect coverage in a 

FedFlex FSA at the present time. As a consequence, reemployed annuitants must have their FSA 

deductions taken from their pay as employees, not from their annuities. 

Resolving Remittance Discrepancies. The FSA administrator will be primarily responsible to 

resolve variances between the remittances from an APO and the amount billed. In so doing, the 

FSA administrator will be expected to contact employees directly to resolve discrepancies. If the 

FSA administrator is unable to gain the necessary information from the employee, the billed 

APO will be expected to provide limited assistance in this regard. 

Pre-tax Indicator. Payroll systems must incorporate a coding structure to indicate that HCFSA 

and DCFSA allotments are on a pre-tax basis. 

Effect on Employment Taxes. FSAs affect employment taxes identical to premium conversion. 

Federal Income Taxes. FSA deductions are excluded from wages before Federal income taxes 

are applied. 

State and Local Income Taxes. FSA deductions are excluded from wages before most state 

and local income taxes are applied. Each state and local government, however, makes 

individual determinations as to whether to allow the pre-tax treatment for deductions under 

FSAs. At the present time, here are the exceptions that we know about: 

o New Jersey and Puerto Rico do not allow for the reduction of taxable income for either 

HCFSA or DCFSA deductions. 

o Pennsylvania does not allow for the reduction of taxable income for DCFSA deductions. 

It is important that payroll systems are coded accordingly. We will research and advise 

agencies on local jurisdictions policies regarding the treatment of FSA deductions. 

FICA Taxes. FSA deductions are excluded from wages before FICA taxes are applied. An 

employee’s pre-tax contributions to an FSA also reduces the employing agency’s FICA
 

contributions. 

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Note: FSA calculations for CSRS Offset Employees will be identical to Premium Conversion. 

Form W-2 Requirements. An employee’s FSA deductions will not be included in Boxes 1 

[Wages, Tips, Other Compensation], 3 [Social Security Wages], and 5 [Medicare Wages and 

Tips] of the Form W-2. The total amount deducted for the DCFSA during the plan year should 

be reported in Box 10 [Dependent Care Benefits]. The total amount deducted for the DCFSA, 

HCFSA and pre-tax FEHB deductions under Premium Conversion can be reported in Box 14 

[Other]. 

Earnings and Leave Statements. To help employees understand the changes to their take-home 

pay, agencies should consider including some explanatory language on the initial earnings and 

leave statements. 

If you have any questions regarding this information, we would prefer that you email us at 

finance@opm.gov, so that we have a record of our communication. You may also contact Laurie 

Bodenheimer on (202) 606-0004 or Cyndy Gilbert on (202) 606-0606. 

Robert A. Yuran, Chief 

Financial Policy Staff 

Retirement and Insurance Service 

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