Flexible Spending Account (FSA)
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.
What is an FSA?
A flexible spending account (FSA) is an employer-sponsored benefit that lets employees set aside pre-tax dollars to 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).
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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!Watch Video
Frequently Asked Questions
What are the different types of FSAs available?
Healthcare FSA 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.
Limited-Purpose FSA 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
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.
Who may contribute to an FSA?
Employees contribute to their own FSA through pretax salary deduction. You can also contribute money to your employees’ FSAs.
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.
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.
Is the employer taxed on unused funds that are forfeited from an employee’s FSA?
No, the employer is not taxed on unused funds.
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.
How can employers limit risk of loss associated with early terminations?
Employers assume a level of risk similar to that the employee takes under the use-it-or-lose-it rule. Potential forfeitures offset the risk of early termination losses for many employers. Flexible plan design options allow you to limit your risk.