Aflexible spending account (FSA) is an
employer-sponsored benefit plan that
gives covered employees an opportunity to set aside payroll dollars on a pretax
basis to help pay for health care and
dependent care expenses. These expenses
can be incurred by both the employee and
his or her eligible dependents.
Smart Business talked to Nancy Busch
of Priority Health about how FSAs can
save employees as well as employers
money over the long haul.
What is reimbursed?
Health care FSAs pay for medical, dental,
vision and prescription drug services. This
means that employees can use FSA money
to pay for medical co-payments, deductibles and co-insurance, dental services like
orthodontia and dental implants, and
vision expenses like glasses or even Lasik
surgery. Over-the-counter drugs, such as
aspirin and cold medicine, can also be
reimbursed as long as they are used to treat
an injury or illness and are not for general
well-being, such as daily vitamins.
A dependent care FSA, which is a separate
account, can also be of great value to
employees. Dependent care FSAs allow
covered employees to put pretax dollars
aside to pay for the care of dependent children up to age 13 and dependent adults.
Some examples of reimbursable expenses
include day care, after-school care or child
care in the summer that allows parents to
work. Contributions to dependent care
FSAs are currently limited to $5,000 or
$2,500 if married but filing taxes separately.
FSA plans almost always run for a 12-month period, unless the employer puts in
place a grace period that extends the plan
year by two months. That’s a recent IRS
addition. Employees become participants in
these programs by signing up at open enrollment and selecting their annual payroll
deductions or plan contributions. By law,
any unspent FSA funds cannot be refunded
to the employee at the end of the plan year.
The funds must revert to the employer.
What don’t they reimburse?
The IRS is pretty clear on this point.
Health care FSAs do not allow for reimbursement of services that are cosmetic,
such as teeth whitening or tattoo removal.
They also do not cover any expenses that
have already been covered by health insurance — meaning no double-dipping and
being reimbursed for something your
insurer has already paid. With regard to
dependent care accounts, you cannot run
through dependent care services if you do
not need those services in order to work —
for example, you have a stay-at-home, non-working spouse.
Why do they make sense for employees?
By using an FSA, employees can enjoy a
tax savings of up to 40 percent for every
dollar they spend on health care or dependent care. FSA contributions bypass the
employee’s gross income. They are not
subject to federal income tax, social security tax, or, in most parts of the country,
state and local income taxes.
Why do they make sense for employers?
It’s a great way to help employees save
money, so it is definitely a valuable benefit
that they can offer to retain and attract
employees. From a financial standpoint, it’s a win-win situation. Employers are not
liable for payroll taxes on any of the
monies contributed to the accounts. That
means that they don’t have to pay Federal
Insurance Contributions Act (FICA) and
Federal Unemployment Tax (FUTA) on
those dollars. Plus, administration fees are
deductible expenses.
The only drawback with health care
FSAs is that employees can be reimbursed
for health care expenses that have not yet
been funded through payroll contributions.
[This is only for health care FSAs and not
dependent care accounts.] For example,
the employee incurs a $1,200 expense in
January but has only contributed $100
through payroll when he submits for reimbursement. The employee will receive the
full $1,200. That’s the law. Hopefully,
assuming the employee doesn’t quit
midyear, the employer will get the remaining $1,100 back over the remainder of the
year’s payrolls. Employers set an annual
plan maximum, which is the maximum
amount that the employee can contribute
to these accounts over the plan year. So,
that is a way that employers can limit their
exposure.
Where do I start?
You will need to determine who you want
to administer your FSA. Most third-party
administrators offer this kind of service at
a reasonable per employee, per month fee.
You’ll also need to purchase a plan document that sets forth all the terms of the
plan. It is a legal requirement. Often, the
plan document is provided as part of the
set-up fee. Otherwise, you can get a plan
document from an employee benefits
attorney.
NANCY BUSCH is director of Small Business and Medicare
Sales at Priority Health. Reach her at (616) 464-8739 or
[email protected].
