Is a FSA right for your company?



A Flexible Savings Account can be a tremendous help to an employee and a nice addition to a benefits package. 

Offered by the employer, an FSA allows employees to set aside pretax dollars through a payroll deduction to pay for specific healthcare expenses, like medications, eyeglasses and copays, just to name a few. 

How it works 

Each year, the federal government sets a cap on the amount of money an employee can set aside for these eligible expenses for themselves and their eligible dependents. In 2021, that figure is $2,750. 

 The employer, however, may set a lower annual maximum allowable amount they would allow their employees to set aside. The employee then determines their own annual election; that amount will be broken down by the number of pay cycles the company has over the course of the year and then deducted from those paychecks. 

Unlike other tax-advantaged benefits, such as a Health Savings Account, a Flexible Spending Account has no plan requirements and the entire chosen benefit amount must be available on the first day of the plan. The FSA can be paired with any major medical health plan … whether an HMO or PPO, fully insured, level funded or self funded. 

One of the concerns for employers, particularly in the small group space, is the “law of uniform coverage,” which states that every participant must be able to pull ALL of their FSA election on Day 1 of the plan. It’s highly unlikely that could actually happen, however, the employer should be prepared for that. 

For instance, if there are six participants in the FSA plan electing $1,200/year, the company would need to have $7,200 available for the participants in the event of such a catastrophe. Then, the employees would essentially be repaying that amount to the company by payroll deduction for the rest of the year. 

An example 

If the employee elects the $1,200 maximum for anticipated medical expenses and is paid semi-monthly, they will have a salary reduction/deduction of $50 every pay period. That money is deposited into a special account that an employee can draw from when they incur an eligible medical expense. 

Most programs offer an FSA debit card, which can be a great option since there is minimal administrative work at the company level. With the debit card, most expenses can be automatically verified through the merchant. 

Again, the card is just for approved medical expenses. If a member were to use this debit card for an expense other than what it is intended for, the claim would be denied and funds would need to be repaid. 

If the employee overestimates the amount of medical expenses and there are funds left in the account at the end of the plan year, those monies will be lost to the company. It is a “use or lose it” benefit, UNLESS there is a provision in the plan design for a year-to-year rollover. The maximum amount that can be carried over for 2021 is $550. 

In the event excess funds are lost to the company, the employer must use the dollars for something for the greater good of the staff. Think things like a company party, breakroom improvements, etc. FSA Claims When employees have FSA-qualified medical expenses, they can use their FSA debit card or submit claims online or by mail, depending on the FSA administrator. Having a debit card with the FSA provides easy access to FSA dollars, especially at pharmacies and doctors’ offices. 

If you don’t have an FSA card that automatically verifies the eligibility of your purchase and are filing a claim, you will need a detailed receipt from your pharmacy, doctor, or other healthcare provider, or an Explanation of Benefits (EOB) from your health plan. Paperwork must show the date of service/purchase; your provider/pharmacy’s name; the service/item purchase; and the amount you paid or are responsible for paying. If a receipt doesn’t include all of the necessary information, the claim can be denied, but can be submitted again later with the proper paperwork. 

Benefits of an FSA 

When an employer includes an FSA in their offering, it increases the overall value of the benefits package. One of the most attractive features of an FSA is the tax savings. FSA dollars are set aside on a pretax basis, that saves both the employer and employee on FICA taxes, because that is a mutual tax. For 2021, that figure is 7.65%. 

In our $1,200/year illustration, over the course of the year, the pretax savings to the $91.80 for both the employer and the participating employee. In some locations, the savings can be greater as the state taxes also may be exempt. 

But, it’s not just about the tax savings. A stronger benefits plan helps employers attract and retain staff. Studies show that insured employees are less likely to worry about their financial situation and to seek care earlier for illness or injury. They also are healthier and happier, more engaged and productive since they are better able to focus on their work. 

Compliance 

  • Your FSA will be governed by your ERISA Plan. 
  • The deductions will be governed by your Cafeteria/Section 125 Plan. 
  • Your FSA is subject to Non-Discrimination Testing. 

Limited FSA 

Sometimes, offering an HSA and an FSA together is a good fit. In the event the employee has an HSA for their health plan, the FSA would then become a Limited FSA. With a Limited FSA, you are restricted to using your FSA dollars to dental and vision expenses. 

Employer Contributions 

While not necessary, an employer may contribute to the FSA on a uniform basis. The employer may match up to $500, whether the employee contributes or not. Above $500, the employer may only make a dollar-for-dollar match. 

Even with an employer contribution, employees can elect for the IRS limit and still receive the employer participation, but it really is contingent upon what the employee contributes. 

Dependent Care FSA 

A dependent care FSA allows an employee to set aside pretax dollars for important services like day care, preschool, summer camps and before- or after-school programs. These monies may be used for children under 13 or those incapable of self-care who live with the FSA owner more than half of the year. 

The dependent care FSA maximum is $5,000 a year for individuals or married couples filing jointly, or $2,500 for a married person filing separately. Married couples have a combined $5,000 maximum. 

Elder care also may be eligible for reimbursement, provided the senior lives with the FSA holder at least eight hours of the day and is claimed as a dependent on the FSA holder's federal tax return. 

Commuting Benefits 

While not a popular option in Texas, a Commuter Benefit can be a great benefit where mass transit is big. Employer-funded parking and mass-transit subsidies are tax-exempt for employees. Using this type of FSA, employees set aside a maximum of $270 to pay their own mass-transit or workplace parking costs through pretax deductions. 

Miscellaneous 
  • An FSA should not be offered to employees who are not eligible for the major medical plan. 
  • The amount a participant can carry over for 2020 and 2021 is $550. Anything over the $550 is forfeited. Rollover amounts do not affect the maximum amount an employee can contribute. 
  • An optional grace period gives employees an additional 2.5 months to incur new expenses using prior-year FSA funds. At the end of the grace period in mid-March, all unspent funds must be forfeited. 
  • Adoption Assistance also may be included in the FSA. 
Want to read the IRS documentation on the FSA? 

Check it out here

Have a question? Let me know!

Comments

Popular posts from this blog

Health Savings what?

For Your Reference: How an alternative funding model can be the answer to your health plan needs