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Flexible spending accounts are a type of account offered by some employers to help employees pay for health expenses. These types of accounts have increasingly become more popular in recent years, but there is still confusion about exactly what they entail and how they work.
A Flexible Spending Account (FSA) is a type of account that allows you to set aside money for certain medical expenses. It’s similar to a Health Savings Account, but it can be used for any purpose and there are no restrictions on how the funds can be spent. Read more in detail here: fsa vs hsa.
You may provide a flexible spending account (FSA) to your workers instead of or in addition to health insurance. It allows people to use pre-tax cash to pay for medical and/or dependent care and childcare expenditures. FSAs reduce taxable income for your workers at the end of the year, lowering payroll taxes for your company.
Zenefits is an HR software that makes it simple for workers to enroll in a flexible spending account (FSA). Employees may join up online in minutes and obtain a Zenefits card that they can use to pay for their qualified costs, including commuting perks. They may also use an online dashboard or mobile app to monitor and manage their money, as well as file claims. Begin a 14-day free trial now.
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In this post, we’ll define an FSA, go through the two types of FSAs, and help you decide whether or not offering FSAs to your workers is a good idea for your company.
Flexible Spending Accounts (FSAs) are divided into two types.
A flexible spending account, sometimes known as a flex account, is a short-term savings account in which an employee may put money down each month before taxes. They may then use those pre-tax monies toward eligible expenditures for that year, such as medical co-pays, in-home health care for a family member, or child care.
FSA accounts use pre-tax cash to lower workers’ tax obligation. As a result of the smaller taxable payroll, your company payroll taxes are likely to be cheaper. There are two types of flexible spending accounts that you could choose to provide.
FSA for medical expenses
A FSA for medical expenses is set up to help employees use pre-tax dollars to pay for medical expenses like:
- Deductibles on health insurance
- Co-pays or office visits
- Prescriptions
- Hearing aids or eyeglasses
- Costs of transportation to and from medical visits
- Premiums for medical insurance
For businesses that can’t afford to offer a healthcare plan to their employees, even through the SHOP exchange, they can offer a FSA for medical expenses that allows the employee to buy their own health insurance or pay out of pocket health expenses using pre-tax dollars.
FSA for Dependent Care
A dependent or child care FSA is also known as a dependent care assistance account (DCA or DCAP). This kind of FSA can be used by employees to pay for any form of dependent care. For example, a FSA for Dependent Care can be used to pay for the following types of care for your dependents:
- Children under the age of 13 may receive childcare and after-school care.
- For handicapped or very sick children of any age, in-home care, nursing homes, or daycare are available.
- For a handicapped or ailing parent, in-home caretaking, medical care, or elder home care are all options.
- For a handicapped or sick spouse, in-home support, medical care, or nursing home care are all options.
In addition to dependent and child care expenses, a FSA for Dependent Care can be used for adoption assistance. If you have employees who are considering adoption or who have children in day care, offering a FSA for Dependent Care can provide them significant year-end tax savings and help you business retain those employees.
How to Make a Flexible Spending Account Work for You
You may wish to engage with a benefit provider to provide a flexible spending account to your employees, just as you could with other employee benefits.
There are four methods available to assist you in establishing FSAs for your employees:
- Gusto is an online HR software supplier that also provides FSA benefits. If you’re now solely conducting payroll and want to add benefits without spending much more than you’re already paying, this is the ideal solution.
- Justworks is a professional employer organization (PEO). If you want to provide your workers with benefit packages comparable to those offered by bigger organizations, this is the ideal solution.
- In addition to health insurance, this private insurance broker provides FSAs. If you’re currently dealing with a broker and don’t mind handling the administrative paperwork yourself, this is the ideal choice. The broker is unlikely to take care of your FSA paperwork and payroll deductions.
- A big insurance company, such as Aetna or Blue Cross, that may assist with FSA management. If you currently utilize these healthcare firms to supply your employees’ existing health insurance, this is the greatest choice. Then you may ask the carrier to include the FSA option.
Working with a payroll provider that also offers HR and benefits may help you handle additional challenges, such as having access to HR onboarding, payroll processing, employee benefits, or worker’s compensation at the same time.
In any case, you’ll want to consult with a qualified benefits provider or specialist to ensure that you’re properly offering one or both types of flexible spending accounts. These companies can often assist you in explaining the notion of a flex spending account to your staff. They can explain what FSAs are and how they function, as well as assist you in enrolling workers.
What Are Flexible Spending Accounts and How Do They Work?
You and/or your workers may contribute up to the maximum limitations of $2,650 for a healthcare flex account (HCA) and $5,000 for a DCA or DCAP after your employees’ flexible spending accounts are set up. These limitations are for 2018 and are subject to change each year.
You may donate business funds to your workers’ FSA accounts if you wish to assist them out — subject to the restrictions we’ll go over below.
It’s worth noting that workers’ FSA payments are subject to an annual “use-it-or-lose-it” clause. At year’s end, no more than $500 per employee per account may be rolled over. You may, however, provide workers a two-and-a-half-month grace period to use up the cash from the previous year before March 15th of the following year. Furthermore, workers must report their receipts by March 31st of the following year.
However, if your workers leave or are fired throughout the year, they must return any unused cash to your company.
4 Key FSA Regulations
We’ve outlined the criteria for FSA accounts to help you weigh the benefits and drawbacks of providing them to your workers, as well as explain how they function to them.
FSA for medical expenses Contribution Limits
For 2018, the IRS has a limit of $2,650 on the amount of pre-tax dollars that can be put into a FSA for medical expenses pre-tax — either by the employee alone or with your help. That’s $50 more than in 2017. Once that limit is hit, either you or the employee can still contribute, but the additional money over and above the limit will be taxed at its marginal rate.
You may contribute to your workers’ medical FSA to assist them. Unless the employee contributes more than $500, employer contributions are restricted at $500 per employee. You may match the employee contribution dollar for dollar in such situation, but no more. The following are three examples:
- Carlos puts $350 into his FSA each year. You, as the employer, may donate up to $500, but no more.
- Julia contributes $1,325 a year. You can match that amount 1:1 with your employer contribution, bringing the total to the pre-tax FSA for medical expenses limit of $2,650.
- Pat makes a yearly contribution of $2,000 to the fund. Because the maximum is $2,650, you can only donate $650.
FSA for Dependent Care Contribution Limits
The 2018 IRS limit for a child or FSA for Dependent Care is $5,000, which is higher than the FSA for medical expenses that’s capped at $2,650. Again, this amount can be funded by you, the employee, or both.
For example, if your employee sets aside $2,000 a year for their FSA for Dependent Care, you can contribute up to $3,000. There’s no 1:1 match like there is for the FSA for medical expenses, but the pre-tax contribution total can’t exceed $5,000.
Employees must use their rollover limit or risk losing it.
The difference between an FSA and an HSA is that your employees must use the funds within the plan year or risk losing them. An HSA, on the other hand, is similar to a 401(k) retirement plan in that the employee may retain the money indefinitely.
An FSA account expires at the end of the year and may only be rolled over for a maximum of $500. As a result, any funds left in an employee’s account at the end of the year (or after the March 15th grace period, if you want to grant one) would return to you, the employer. As a result, workers with FSAs should be reminded at the end of the year to spend any leftover funds in their accounts to prevent losing the money they’ve saved.
An Employer-Owned FSA is one that is owned by the employer.
You, the employer, own and operate an FSA. In the marketplace, there is no way for an employee to acquire an FSA on their own (unlike an HSA that an employee could secure outside of the workplace). As a result, if an employee quits for whatever reason, the FSA balance is returned to the employer. Employees who leave or are fired forfeit any unused contributions.
Additionally, any non-rolled over FSA funds above $500 are returned to you, the employer, at the end of the year. Because you, not the employee, are the owner of the FSA account, this is the case.
The Top 4 Reasons to Have a Flexible Spending Account
The following are the top three advantages that a flexible spending account may provide as an employer:
Simple to Use
After an employee registers and money are available in their FSA account, the FSA account provider, such as a benefits organization or banking institution, will most likely provide them a debit card. It’s simple to use a debit card. The money comes out of their FSA account when they use the FSA debit card for an allowed transaction, such as paying for a prescription. You won’t have to explain how to access their FSA or submit receipts for reimbursement because of its simplicity of use.
Simple to Plan For
Each employee gets to choose how much they want to put into their FSA at the start of the benefits plan year. You’ll need to figure out how much their pre-tax FSA deductions are – payroll software can assist you with this. They can only adjust the FSA contribution amount once a year since the contribution amount is set for the whole year. Once you’ve set it up, you’re done for the year.
A Wide Range of Applications
Your workers will be delighted to learn that they may use their medical FSA towards any qualified medical cost. This may include their child’s dental checkup, their own contact lenses, or prescriptions — anything medically connected is likely to qualify. However, unless a physician has requested or recommended them, a medical FSA cannot be used for over-the-counter drugs like aspirin. Employees may also use a health care FSA to pay for their insurance payments.
The FSA for Dependent Care can be used to pay for an adoption, in addition to a babysitter, daycare, or nanny. Be sure your employees understand all the benefits they can get by using pre-tax dollars to pay for these expenses.
Great Way to Attract & Retain Talent
An FSA allows you to help employees save pre-tax dollars. That’s a perk. If you have fewer than 50 employees, you don’t need to provide health insurance by law. So if you don’t or can’t provide health insurance, an FSA is a great way to help your employees afford individual health insurance or pay for health expenses using pre-tax dollars. Many young millennial workers (who don’t often get sick) may actually prefer an FSA to a health insurance plan. And by offering a FSA for Dependent Care you may be able to attract working parents, or those caring for family as well.
The 3 Biggest Pitfalls of Providing Flexible Spending Accounts
There is no such thing as a flawless employee perk, and a flexible spending account is no exception. The following are the top three disadvantages of an FSA for an employee:
Employees must use it or risk losing their jobs.
Employees may get dissatisfied because they must spend their contributions before the end of the year or risk losing any leftover cash. It’s difficult to forecast your costs for the year. As a result, you may need to remind your employees to spend those money on a regular basis. You may, for example, encourage them to obtain new glasses or make family dentist visits before the end of the year so they don’t have a large (or any) balance in their account.
You, on the other hand, get to retain whatever is left over in their FSA as the company owner. However, any cash left over must be used to administer the FSA. This may be a significant benefit for your company since it can lower your FSA administration expenses to zero or allow you to boost your company’s FSA payments to your workers the following year. Consider how they’ll react if you boost your FSA donations. It’s like giving your employees a tax-free increase.
Employees are unable to change their contribution amounts.
Once an employee decides on a contribution amount for the year, they can’t modify it no matter what happens. This may elicit resentment from your workers against you as the company owner, so make sure that all of your employees are aware of their FSA’s restrictions.
Employees are not allowed to take their FSA funds with them.
Employees cannot take their FSA with them if their job is terminated or they depart. In contrast to an HSA, which is held by the employee, the FSA is owned by you, the employer. That’s not an issue for you, but make sure your workers are aware of the situation before enrolling in an FSA. For example, if they have $2,000 in their account and decide to leave, that $2,000 remains in your possession.
If a FSA for medical expenses feels too restrictive, you may want to consider looking at cafeteria benefits instead. One cafeteria benefits option is called a premium only plan (POP) and like an FSA it allows you to contribute pre-tax funds to help pay for employee health insurance (but you can’t use a POP to pay for other health expenses or for dependent care expenses). Here’s a link to our section 125 cafeteria benefits article for more information.
Flexible Spending Accounts: The Bottom Line
By utilizing pre-tax cash to cover healthcare, dependent care, or childcare expenditures, a flexible spending account may be a wonderful value-added incentive for your workers. It may be a win-win situation for both your workers and you if they grasp how to utilize their FSA. Their FSA not only helps them save money on healthcare and childcare, but it also helps them save money on taxes at the end of the year. Your payroll taxes are likely to decrease as well.
Remember to look into Zenefits, a small business payroll, HR, and benefits service that can assist you in locating and managing FSA and employee benefits for your company. For 14 days, you may try it for free.
Visit Zenefits for more information. for more information.
A Flexible Spending Account (FSA) is a tax-advantaged account that allows employees to set aside pre-tax money for medical, dependent care or other expenses. This account can be used as a health savings account (HSA). It’s important to note that an FSA cannot be used for retirement contributions. Reference: fsa card.
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