Flexible Spending Accounts (FSAs)
Employer sponsored flexible spending accounts (FSAs) are benefit plan arrangements that allow employees to pay for certain health care or dependent care expenses on a pre-tax basis. It can be offered alone or in conjunction with a major medical plan.
Flexible spending accounts offer significant tax advantages. The employee’s pretax contribution to the FSA lowers the employer’s FICA tax liability. In addition, employers that offer FSAs to employees could save on Federal Unemployment Taxes (FUTA), State Unemployment Taxes (SUTA) and Workers Compensation taxes. Please also note, the FSA can significantly enhance an employer’s overall benefits program and/or reduce some of the pain of the inevitable cutback in benefits to employees.
Employer Funded FSA
The employer may also elect to participate in an employer funded FSA. Whereas, the employer is contributing a portion of money to the FSA account on the employee’s behalf. Reimbursements for eligible expenses are excluded from employee income. Typically, HRA’s are more popular because the employer has a lot more freedom to design the plan as they wish without the strict guidelines of the IRS.
Under the employee funded FSA, the employer has the option to offer two types of spending accounts. A dependent-care FSA, where an employee sets aside money to help pay costs typically associated with daycare .
But even more employees opt for a medical FSA, in which they can set aside money to pay for routine items such as health insurance copays, uninsured treatments such as vision care or even over-the-counter drug purchases.
In both cases, the money is taken out through regular/equal payroll deductions. In both cases, the FSA deductions come out of an employee’s paycheck on a pretax basis. That means less of their earnings are subject to tax.
Employers define the maximum employee contributions but can’t exceed the IRS allowed amount which is; medical $3,050 effective 1/1/23, and dependent care $5,000 (or $2,500 if the employee is married and files a separate income tax return).
It is also important to understand the extension and rollover previsions now allowed under the IRS and Department of Treasury also referred to as “roll-over” (see roll-over notice), “grace period” and “run-out period” (see Plan Features). These factors will have an impact as to whether you allow a portion of your employee’s unused balance at the end of the year or it may be that your company plans to allow more than 12 months in which funds can be used. Lastly, it is important to understand how long you have to submit your receipts for the previous plan year before the option expires.
Employees who terminate their employment before the end of the flexible spending account year have several options. They may forfeit their flexible spending account balances, if they fail to continue scheduled contributions and revoke their benefit elections; or, they may continue to contribute to the flexible spending account through COBRA until year’s end, thereby continuing to be covered by the plan until the end of the plan year.