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 health-related items.”
Smart Business spoke with Berenson about health care flexible spending accounts and how they can help employees achieve optimal health and financial well-being.
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 HCFSA reimbursement?
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 HCFSA seminar.
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 firstname.lastname@example.org.