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What is a Flexible Spending Account?
A Flexible Spending Account or FSA is a tax-free, employee-funded reimbursement plan. There are two types of FSAs. The Health Care FSA covers out-of-pocket medical, dental, and vision expenses. The Dependent Care FSA covers work-related day care expenses. With the FSAs, the employees can save as much as 40% on predictable expenses by avoiding federal income tax, FICA taxes, and state and local income taxes in most jurisdictions. With the FSA, the employee decides how much to put in the account based on anticipated expenses. That amount is payroll-deducted in equal installments throughout the plan year. When the employee has an expense, he/she may either pay the expense and request reimbursement, or use a BenefitsWorkshop debit card (if offered) to pay the expense. All expenses must be documented to prove they are eligible, whether the debit card is used, or a reimbursement is requested for an expense paid another way. An exception is made for debit card transactions where the expense is a standard copayment under the employer's medical plan. FSAs are valuable tools that can help employees manage rising out-of-pocket expenses by avoiding taxes, thereby lowering the real cost of the services received. What are the prerequisites?
The employer must take some risk with the Health Care FSA plan. The FSAs are "employee-funded", but
the Health Care FSA acts like an employer-provided, self-funded medical insurance plan. This is
the mechanism used to make the expenses tax-free. Essentially, the employee gives up a specific amount
of taxable income in return for the employer's agreement to pay an equal amount of eligible expenses under
the self-funded insurance plan. The money the employees pay into the plan is similar to a "premium".
The amount they agree to contribute during the year is the "benefit". As long as the employee is paying
the premiums, he./she is entitled to the full benefit.
The risk comes in when an employee incurs eligible expenses and submits a request for reimbursement in an
amount greater than his/her contributions to date. This is a cash-flow risk. The employee will then, in most cases,
continue to make contributions and will repay the full amount of elected at the beginning of the year.
But some employees may terminate employment before repaying the amount they have received in excess of
his/her contributions. The employer may not attempt to recover this overpayment, because to do so would eliminate
the employer's risk and without this risk, the plan is not considered insurance and therefore not be eligible for
favorable tax treatment.
The good news is that when these plans are viewed in aggregate, the premiums nearly always exceed the benefits paid
to employees. In addition, any unused funds belong to the employer. This is the employees' side of the risk
necessary to make this plan act like insurance. In addition, the employees save on federal, FICA, and in many cases
state and local taxes, and the employer saves on matching FICA contributions. This is typically 7.65% of all
employee contributions. This reduction in employer-paid taxes can offset the risk and help pay administrative fees.
From a payroll perspective, employers must be able to take tax-free deductions from the employees' paychecks.
It is also necessary to provide BenefitsWorkshop with an initial deposit equal to two weeks of anticipated disbursements
if debit cards are used, and prompt transfer of funds each week to cover actual disbursements.
What are the costs?
FSA plans generally have an implementation fee that starts low and increases based on the number of eligible
employees. They also have a month "per participant per month" administration fee that starts around
$5.00 and drops as the number of eligible employees increase. This fee may be subject to a monthly minimum.
Other optional services carry additional charges. Optional services may include
compliance services such as plan documents and nondiscrimination testing, printing
of communication materials (although "free" materials are available), debit cards to access
FSA account balances, and participation in employee meetings.
To set up an FSA Plan, you simply:
On an ongoing basis, you simply send funds to BenefitsWorkshop on a weekly basis to cover disbursements.
You will typically receive a disbursement report via e-mail each week and the funds are expected by the next
business day via wire transfer or ACH. We would also need information on newly eligible employees,
terminations and address changes.
That is essentially all that is involved, and BenefitsWorkshop can guide
you every step of the way. Our comprehensive guidance and materials
will make this one of the easiest programs you have ever implemented...and
probably the most cost-effective. We are also a quick e-mail away with the
answer to any questions that you can't find on our site.
First you request a proposal. Then you review the proposal to see the costs and the services to be provided.
Once you are satisfied, simply contact us and we will start the implementation process.
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