Looking to help your employees save money on health care expenses? A flexible spending account may be the answer.
What is an FSA?
A flexible spending account or FSA is a special account that allows individuals to put aside tax-free dollars from their paycheck to cover certain health expenses and dependent care that are not covered by health insurance. Qualified expenses include things like:
- Co-pays for medical expenses and drugs
- Doctor and hospital visits, including surgeries
- Prescription drugs (over-the-counter medications are not covered without a prescription)
- X-rays and lab tests
- Dental and orthodontia expenses
- Vision expenses
- Medical equipment, such as wheelchairs
There are three types of flexible spending accounts – health flexible spending accounts (HFSA), dependent care flexible spending accounts (DCRA), and limited purpose FSA accounts (LPFSA). HSFAs can be used for medical expenses not covered by health insurance, and DCRAs can be used for childcare expenses for dependent children up to the age of 13. LPFSAs are accounts that can be paired with a health savings account (HSA) to cover non-medical expenses such as vision and dental.
Flexible spending accounts are similar to HSAs, but with key differences. Unlike HSAs, FSAs can be used with any type of health plan, and funds do not roll over from year to year. With a health flexible spending account, you can spend up to your elected amount for the year, at any time, regardless of whether you’ve completed your contributions. For dependent care flexible spending accounts, employees can only be reimbursed for what they have contributed so far that year.
Who is eligible for an FSA?
If your business offers an FSA, all employees are eligible to participate. Even if they are not enrolled in the employer’s medical plan, they may still participate in an FSA.
Benefits of FSAs
FSAs can be a great option to help both you and your employees save money. For employees, an FSA allows them to contribute tax free dollars into an account to cover planned health expenses. This can be especially helpful for employees who know they have health expenses which will not be covered by their health plan. Since contributions are taken directly from their payroll, FSAs are also a very simple way for employees to put aside money.
For businesses, FSAs can help you save money on payroll taxes. Since contributions are deducted from the employees’ payroll, the reduced taxable income means less employer payroll tax contributions.
An FSA can also help employers retain and attract new talent. FSAs often lead to greater benefits satisfaction for current employees, making them more likely to stay with the company, reducing turnover expenses. FSA programs are also an attractive benefit that are recognized as a key component of a comprehensive employee benefits package and offering one could make your business more attractive to new talent.
How to set up an FSA account
Though FSAs can be set up completely internally, it is recommended that businesses work with their independent agent to find out what administration options are available through insurance providers or other parties to avoid conflicts of interest for HFSAs, DCRAs and LPFSAs. Once you’ve determined which administrator you’d like to work with, the two big questions you’ll need to answer are:
- How much money will you offer employees through the FSA? The total amount each employee can contribute each year is determined by you, as long as it does not exceed the $2,750 HFSA limit and $5,000 dependent care limit set by the IRS.
- Will you incorporate any grace periods or carryovers? Employers have the option to include either a $550 carryover allowance from the previous year or offer an extension of up to two and a half months where employees can use FSA funds from the previous year. You can offer one or neither, but not both.
Once these plan parameters have been decided, you can begin working with your chosen administrator to outline and launch your FSA program.
Can employers set up FSAs on their own?
The short answer is yes, a business can set up their own FSA program without using an outside administrator. However, experts strongly recommend against this approach due to employee privacy and changing legislation.
First and foremost, handling an FSA program completely internally would leave the project lead (likely a member of the human resources department) with access to protected health information. This can violate HIPPA laws and cause serious conflicts of interest as this person may be involved in making company decisions which could be consciously or unconsciously influenced by the knowledge of employee health conditions.
Second, legislation surrounding FSAs can be difficult to understand and regularly undergoes changes – working with your agent and administrator will help your company stay on top of these changes.
How much does it cost to set up an FSA?
Setting up an FSA program for your business is relatively low cost. In general, you will pay an annual fee to the administrator as well as a monthly fee for each employee who is enrolled in the program.
Do employers have to offer FSAs?
No, it is not required for an employer to offer an FSA program for employees. However, FSAs are recognized as a key piece of a comprehensive employee benefits package and can be an attractive offering for retaining and recruiting employees.
How much should be put in an FSA?
The amount of money contributed to each employee’s FSA is determined by the individual employee, up to the limit set by the employer. Businesses can set their FSA contribution limit to any amount they choose, as long as it complies with IRS guidelines. The biggest thing an employer must keep in mind when deciding this limit is the ensuring they have enough funds to cover incoming requests from employees.
How can someone start an FSA with Priority Health?
If you’re interested in setting up an FSA program for your employees through Priority Health, you can contact your agent or another Priority Health representative to get a quote and receive more information. In the meantime, learn more about all our business offerings here.