In today’s society, the rising cost of
medical care is a fact of life. Employees
may have a number of ordinary health care expenses not covered under any benefit plan. These costs can add up and be a
significant part of employees’ yearly
expenses. A health care flexible spending
account (HCFSA) offers employees a way
to better manage these expenses and gain
a real tax savings.
“As the cost of health care continues to
rise, employers are looking for new and
interesting ways to help employees pay
for their health care,” says Bill Berenson,
senior vice president of Aetna’s Small and
Middle Market Business for the North
Central Region. “HCFSAs allow employees to contribute pretax dollars to a special account, which they can then use to
pay for medical care as well as everyday
Smart Business spoke with Berenson
about health care flexible spending
accounts and how they can help employees achieve optimal health and financial
What is an HCFSA, and how does it work?
An HCFSA is a special account that
employees enroll in each year. Employees
direct part of their pay on a pretax basis
throughout the year to the flexible spending account. Then, they use those funds to
pay for qualified health care expenses.
Because employees’ money goes into an
HCFSA before withholding federal
income, FICA (Social Security and
Medicare) and most state taxes, employees pay less in taxes. Depending on their
individual tax bracket and where they
live, employees may realize a tax savings
of up to 40 percent of their HCFSA contribution amount.
By offering an HCFSA, employers save,
too. Since employers do not pay taxes on
employees’ pretax contributions, they pay
less in FICA. Employers also earn interest
on the funds while they hold the money in
their bank account. They retain employees’ contributions and reimburse the
health insurer for claims when requested
or at the end of each month.
Which health care expenses are eligible for
The HCFSA reimburses employees for
certain out-of-pocket health care expenses. According to IRS rules, eligible out-of-pocket medical/dental expenses include,
but are not limited to:
- Deductibles, co-pays and coinsurance
- Eye care, such as eye exams, eyeglasses and contact lenses for vision correction, saline solution and LASIK surgery
- Hearing exams and hearing aids
- Doctors’ fees and routine physicals
- Laboratory fees
- Chiropractic treatment
- Dental work and orthodontia
- Drugs and medicines — both prescriptions and over the counter
In general, how much should employees
contribute to their HCFSAs?
The actual dollar amount varies from
employee to employee based on their ability to contribute as well as the size and health of their families.
The good news is that employees can
estimate many out-of-pocket health care
costs ahead of time, which will help them
determine how much they should contribute to their HCFSA. A careful estimate
of yearly expenses will help reduce the
risk of losing unused funds.
Does the IRS also have rules related to contribution limits and remaining balances?
The IRS does not set a specific monetary
limit on the annual amount employees
can contribute to their HCFSA. However,
employers offering an HCFSA generally
establish an annual maximum.
If, after the end of the plan year, employees do not use all of the money contributed to their HCFSA, the IRS requires
forfeiting these remaining funds. The IRS
calls this the ‘use it or lose it rule.’
Employers can, however, offer employees
a grace period of up to two and a half
months from the end of the HCFSA plan
year to spend unused money in their
HCFSAs. Eligible expenses incurred during this grace period are applied to any
prior year remaining HCFSA balance. This
plan provision reduces the risk of employees forfeiting their funds.
As an employer, how can I help my employees make the most of their HCFSA?
Once your employees enroll in the
HCFSA, ongoing awareness of their
account balance, coverage period and
claim filing deadline will allow them to
maximize their HCFSA potential. As an
employer, you can help employees make
the most of their HCFSA by working
closely with your health insurer to provide timely communications, using online
resources and holding the occasional
By offering HCFSAs to your employees
and collaborating with your health insurer, you will help your employees achieve
physical and financial well-being.
BILL BERENSON is senior vice president of Aetna’s Small and Middle Market Business for the North Central Region. Reach him at
(312) 928-3323 or [email protected].