United States 

Office of 

Personnel Management 

The Federal Government’s Human Resources Agency 

Retirement and Insurance Programs
 

Benefits Administration Letter
 

Number: 03-306 Date: March 31, 2003 

Subject: Flexible Spending Account (FSA) Program: Payroll Specifications 

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

benefits with pre-tax dollars. The initial FedFlex benefit, Health Benefits Premium Conversion, 

was implemented in October 2000. We are now enhancing FedFlex to include a second pre-tax 

benefit for Flexible Spending Accounts (FSAs) which will be implemented July 1, 2003. 

On January 9, 2003 you received Benefits Administration Letter 03-301 giving preliminary 

information regarding the Flexible Spending Account program. This Letter provides agency 

payroll offices with additional guidelines for the deduction and remittance of FSA allotments. 

These guidelines are designed to provide the information you will need to make software or 

other system enhancements necessary to implement correct payroll processing for this program. 

FSA elections made by an employee are completely voluntary and must be made on an annual 

basis during the open enrollment period for the upcoming plan year. FSAs are not carried over 

from one plan year to the next. OPM selected SHPS, Inc. (SHPS) as the third party administrator 

for the FSA program. 

Two FSAs will be offered to eligible employees: 

•	 A Health Care FSA [HCFSA], through which employees may 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 maximum amount an employee may 

set aside in any tax year will be $3,000 and the minimum will be $250. 

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

to pay for eligible dependent care expenses. The maximum amount an employee may set 

aside in any tax year is $5,000 ($2,500 if the employee is married and filing a separate 

income tax return) and a minimum amount of $250. 

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 or income taxes on these allotments and their employing agencies also avoid paying 

employment taxes. Employees who voluntarily elect to participate will identify an annual 
amount of salary to be contributed to their FSA via SHPS. SHPS will translate these annual 

elected amounts into pay date allotments and request payroll office to deduct them and remit 

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

accounts for reimbursement as they incur eligible expenses. 

The Office of Personnel Management (OPM) will conduct an open season for enrollment in the 

Flexible Spending Account Program (FSA), beginning in mid May and running through June 20, 

2003. This will be the first opportunity for most Federal employees to voluntarily allot pre-tax 

salary to a HCFSA or DCFSA. 

The effective date of the FSA program is July 1, 2003. The initial plan year will end on 

December 31, 2003. Open enrollment for the first full plan year will take place concurrent with 

the FEHB open season in November/December of 2003. All future FSA plan years will be 

January 1 through December 31 and employees must re-enroll each year to be eligible. 

Information on requirements specific to your agency payroll office (APO) will be determined by 

direct discussion between the APO and SHPS. They will be essentially identical to those 

currently in place for long term care (LTC) premium payments. 

Throughout this letter, we use the term “employee” to mean an eligible Federal civilian 

employee. Employees who are eligible for FEHB coverage (even if not enrolled) are eligible to 

voluntarily elect an allotment for a HCFSA and a DCFSA. Additionally, employees in a 

temporary appointment of less than one year; and seasonal and intermittent employees are 

eligible to voluntarily allot money for a DCFSA. For more information on FEHB eligibility, 

please visit our website at http://www.opm.gov/insure/health/eligibility/index.asp. Annuitants 

and military personnel are not eligible for this program. Most employees of Executive Branch 

agencies, as well as employees of non-executive branch agencies that choose to participate will 

be eligible. When we offered premium conversion in 2000, almost all agencies that did not 

already have a program in place under independent compensation authority chose to adopt it for 

their employees. 

The U.S. Postal Service, the Judiciary, and some bank regulatory agencies already offer FSAs to 

their employees and are not covered by FedFlex. Agencies that adopted FedFlex for premium 

conversion are eligible to adopt the FSA benefit as well. 

Enrollment procedures 

Employees will voluntarily enroll for HCFSAs and/or DCFSAs directly with SHPS, either online or through a toll-free call to a SHPS customer service representative. The enrollment will 

not be processed or approved by the APO or the human resources office. Thus, the FSA 

enrollment process is different from the Federal Employees Health Benefits (FEHB) and Federal 

Employees' Group Life Insurance (FEGLI) Programs but very similar to the Federal Long Term 

Care Insurance Program application process. 

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Communication of payroll office identifier 

One of the items an employee will need to know to set up one or more FSA accounts is the 

payroll office identifier for his/her payroll provider. This identifier will be the basis for SHPS 

collection process. Since the FSA enrollment will not flow through APOs or human resources 

offices, employees must input their payroll office identifier on the enrollment. The payroll office 

identifier will be provided via a drop down menu on SHPSs web-based enrollment system. The 

payroll office identifiers to be included in the entire enrollment process are the same as those 

used by the Long Term Care Insurance Program. SHPS will be contacting APOs to ensure that 

the identifiers are accurate. 

Billing file 

For employees electing an FSA allotment, SHPS will forward to APOs a billing file containing 

all necessary information to make FSA allotments from payroll. This file will be transmitted in 

the format and on the schedule agreed upon by the APO and SHPS. At the APOs option, the 

billing file can either be a “change” file or a “full” file. A change file will include only new 

allotments, changes to allotments, and stop allotments, while a full file will contain complete 

allotment information for all enrollees. The billing file will be provided to the APO on the 

schedule agreed upon by the APO and SHPS. 

The billing file will contain information such as: 

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

• Social security number of employee 

• Payroll office number (PON) 

• Amount of allotment 

• A plan number indicating a HCFSA or DCHSA (by 1/1/04) 

• Pay Period Dates 

• One-character code, as follows: 

A - initial allotment 

C - change allotment amount 

D - cancel allotment 

N - no change in allotment amount (on full files only) 

Amount to deduct 

SHPS will calculate the amount of payroll allotment based on the total amount elected by an 

employee for one or both accounts. The total amount elected by the employee will then be prorated over the number of pay dates the employee has remaining in the Plan year. It is critical, 

therefore, that the APO verify with SHPS information about each pay date/payroll cycle it 

services. 

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The APO will reduce individual employee pay by the exact amount specified by SHPS on the 

billing file and remit that amount to SHPS. Therefore, you will not have to calculate the amount 

of FSA allotments. 

Order of precedence 

APOs will deduct FSA amounts in the order specified in their established rules of precedence. If 

an employee elects both a HCFSA and DCFSA, HCFSA elections must be placed before the 

DCFSA elections. Because employees agree to salary reduction via an allotment, we 

recommend they be placed in an order of precedence similar to that of premium conversion. Do 

not take any partial allotments. 

IRS Limitations apply to DCFSAs on an Aggregate basis 

The maximum DCFSA election for an employee is set at $5,000 by IRS law. This $5,000 

limitation is the maximum pre-tax benefit for all dependent care programs available to the 

employee, including under programs other than FSAs. As a result, if an employee is receiving a 

child care subsidy pursuant to Public Law 107-67 Section 630, and the combined benefit to the 

employee exceeds the $5,000 limit, both the employee and the Agency will be responsible for 

tax on any aggregate amount that exceeds $5,000 ($2,500 if married but filing separately). 

Unlike DCFSAs, there is no maximum HCFSA allotment specified by IRS law. While the 

maximum permitted under FedFlex is $3,000, an employee or spouse may have another FSA 

available through another employer plan. Thus, the aggregate HCFSA allotments may exceed 

the $3,000 FedFlex maximum. 

Effective date of Plan year and initial allotment 

For the initial Plan year that begins July 1, 2003, employees will not be eligible for 

reimbursement until the first allotment is received by SHPS. The first payroll allotment will be 

taken from the first pay date in July. For all future years, the plan will be effective from January 

1 through December 31 and all eligible expenses incurred by an employee within the plan year 

will be reimbursable. This requires no action on the APOs part. The APO will simply allot what 

the billing file from SHPS says to allot. FSAs must be annually elected by employees. If an 

employee does not make an election during the open enrollment period of November/December 

of each year, his or her allotments will not continue into the new plan year. 

This program was a major topic at last years Benefit Officers Conference in June 2002 and was 

discussed in the FEHB press release in September 2002. Payroll offices were again notified in 

January 2003 through Benefit Administration Letter 03-301. Because operation of the program 

will be patterned so closely to that of the Long Term Care Program, we expect no difficulties in 

having this program fully implemented on a governmentwide basis by the July 1, 2003 deadline. 

However, please let us know immediately if you anticipate any difficulty in implementing FSA 

allotments in July and include: 

• specific information about the anticipated difficulties 

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•	 a date certain for implementing FSA allotments 

•	 an agency contact and phone number that we may refer employees to for additional 

information. 

If we do not receive notification from you within a week of transmitting this letter, we will 

assume that you will be prepared to implement effective the July 1, 2003. 

Remittance of allotments and associated information 

On each pay date, the APO will remit the payroll allotments to SHPS along with information 

supporting the allotments. The form of remittance, both the method by which payment is made to 

SHPS, and the format in which the allotment data is provided to SHPS, will be the methods 

patterned after LTC premium remittances and agreed upon by the APO and SHPS. At a 

minimum, the remittance file will contain information such as: 

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

•	 Social security number of employee 

•	 Payroll office number (PON) 

•	 Pay Period Dates 

•	 Total amount remitted 

•	 Reason for allotment not being made and date status was effective: 

o	 Death 

o	 Term/Retired 

o	 Separated from service 

o	 Transferred to another APO 

o	 Unrecognized SSN 

o	 Seasonal/Teacher 

o	 Unpaid Leave/Disability 

o	 Insufficient Funds Health Care 

o	 Insufficient Funds Dependent Care 

o	 Other 

“All or none” deductions 

If an employee salary is ever insufficient to cover the full amount for FSA allotments, you will 

deduct nothing at all for that period. You will not make a partial allotment at any time during 

2003. If a salary allotment is missed, SHPS will freeze the account for all HCFSA expenses 

until allotments begin again or the situation is resolved through contact with the employee. 

DCFSA accounts will not be frozen because employees can only be reimbursed for amounts 

already in their accounts. 

Any time an allotment is missed, SHPS will recalculate the allotment schedule such that the 

unpaid balance of the employee’s annual election will be paid over the pay dates remaining in 

the calendar year. The previously scheduled allotment will be doubled unless a higher multiple 

is needed given the number of remaining pay dates. No action is needed on the part of the APO. 

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Reconciliation and reporting requirements 

SHPS is solely responsible for making sure it receives the proper allotment for each enrollee. 

You are responsible for taking the allotments and timely remitting the amounts billed by SHPS, 

and assuring that the payment file total, together with any error or “kick out” file or reports 

balances to the total remittance requested by SHPS for the period. 

Testing schedule 

Testing of the specific billing files, remittance files, as well as electronic transmissions of these 

files, will begin in mid May, and continue through early June. Testing schedules will be 

established between each APO and SHPS. 

The testing will: 

•	 encompass the specific field data on the files, 

•	 include cycles to allow for testing adds, changes, and deletes, as well as status change 

information, and 

•	 ensure balancing of the remittance file. 

The following is an example of a high-level testing schedule: 

•	 May 5 - Initial test billing file from SHPS to APO - all adds 

•	 May 15- Initial test remittance file from APO to SHPS - including status changes, missed 

allotment deductions, etc. 

•	 May 28 Second test billing file from SHPS to APO - adds, changes, deletes, and no 

changes 

•	 June 9 - Second test remittance file from APO to SHPS 

•	 SHPS would like a third round preliminary production file to be used for eligibility 

verification purposes. June 24 with a response file by June 26. 

NOTE: SHPS will develop a detailed testing plan to be implemented with individual payroll 

offices. 

SHPS will be contacting each APO directly to discuss what, if any, file changes may be 

necessary. If you do not hear from someone by April 3, please call Cindy King at (502)267-

3169. 

We want to thank all agency officials for their hard work and continued cooperation in getting 

this important new benefit off the ground. We will continue to consult with you and keep you 

informed of developments as we move closer to making payroll allotments a reality for FSA 

elections. If you have any questions regarding this information, you may contact the SHPS 

payroll allotment implementation team by sending an email to OPMTech@SHPS.net. 

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 __________________________________ _______________________________ 

 

Frank D. Titus 

Assistant Director

For Insurance Services 

 Robert A. Yuran, Chief 

Financial Policy Staff 

Retirement and Insurance Programs 

 

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