Flexible Spending Account
Reduce your employees out-of-pocket healthcare expenses by setting up an FSA!
Flexible Spending Account
A flexible spending account is an employer-sponsored benefit account that allows employees to set aside pre-tax funds to help pay for eligible out-of-pocket healthcare expenses. Employers choose to implement Flexible Spending Accounts to help their employees save substantial tax dollars, with some tax saving for employers too. The extent to which an employer will experience tax savings and other advantages depends on the type of plan, the nature of the workforce, and in some cases state and local laws. When all said and done, an established FSA program can yield more dollars in tax savings than the fees spent to administer the plan. One of OCA’s current FSA clients with 50 participants generated $4,200 in FICA savings which netted the employer a net gain after administrative fees.
With a healthcare FSA, your employees can pay for eligible healthcare expenses on a pre-tax basis, which reduces the amount paid
for federal income tax, FICA tax and, as applicable, their state income taxes. Healthcare FSAs cover an extensive list of eligible, reimbursable expenses, as defined by IRS Code Section 213(d).
Dependent Care FSA
Dependent care FSAs (DCAs) gives your employees the ability to pay for work related dependent care expenses with pretax dollars, which allows them to save on federal income tax, FICA tax and, as applicable, their state income taxes. DCAs
may provide your employees more tax advantages than the federal income tax credit.
If you offer an HSA-compatible high-deductible health plan paired with a health savings account (HSA), you may offer only a limited purpose FSA to those employees that have an HSA. The limited-purpose FSA is designed to complement the HSA and may be established to pay for eligible vision and dental expenses. Medical expenses are not permitted, because the tax-favored HSA is used to fund those costs.
Do you offer your employees an HSA? They can also have a Limited Purpose FSA!
A limited purpose FSA (LPFSA) covers qualified out-of-pocket dental and/or vision expenses for the employee and their tax dependents. Eligible expenses include items like dental cleanings, fillings, crowns, and braces. Qualified vision expenses include eye exams, contact lenses, eye glasses, and lasik!
Frequently Asked Questions
Who can offer an FSA plan?
Most employers can offer an FSA, with a few exceptions. You may want to check with your legal or tax advisor regarding your specific situation.
Can I offer my employees a grace period option?
Yes. The grace period allows employees up to two months and fifteen days beyond the end of the plan year to use their contributed funds. This lets employees incur and submit reimbursement requests using the previous year’s FSA balance. In the case of a calendar
year plan, the grace period may extend to March 15 of the following year. Expenses from January 1 through March 15 can be reimbursed from the previous year’s FSA.
Can owners or partners participate in an FSA?
No. According to IRS guidelines, anyone with two percent or more ownership in a schedule S corporation, LLC, LLP, PC, sole proprietorship, or partnership may not participate. C-corporation owners and their families are eligible to participate in FSA plans because they are considered to be W-2 common law employees.
Do non-discrimination rules apply?
Yes. Based on requirements set by the Internal Revenue Service (IRS) Section 125 Cafeteria, flexible spending accounts cannot discriminate in favor of highly compensated or key employees. To ensure that employers are in compliance with these rules, nondiscrimination testing is required annually.
Can an FSA be offered with any health plan?
Yes. An FSA plan can be offered alongside any medical or dental plan. However, according to IRS regulations, if employees contribute to an HSA, they can only enroll in a limited-purpose FSA.
How does the grace period affect employees’ ability to contribute to an HSA?
An employee who’s enrolled in a healthcare FSA with a grace period can contribute to an HSA if there’s no money left in the FSA at the end of the plan year or they’ve reached the end of the grace period.
What regulations should I be aware of?
Healthcare FSAs are governed by Internal Revenue Code Section 125 when offered through a cafeteria plan. If the healthcare FSA isn’t offered through a cafeteria plan it’s subject to Internal Revenue Code Section 105.Usually they’re subject to ERISA, COBRA and HIPAA
Can an employer charge an employee for the balance of a healthcare FSA if the employee leaves employment mid-year?
No. The Uniform Coverage Rule does not allow employers to charge an employee for the balance of an FSA if he or she terminates mid-year. The rule indicates that the maximum amount of reimbursement from a healthcare FSA must be available at all times during the coverage period. The uniform coverage rules prohibit an employer from designing a plan that ties the maximum amount of reimbursement at any particular time to the amount the employee has contributed. Similarly, the employee contribution payment schedule for the required amount for coverage under a healthcare FSA may not be based on the rate or amount of covered claims incurred
during the coverage period. Employee salary reduction payments must not be accelerated based on the employee’s incurred claims and reimbursements.
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