Flexible Spending Accounts are designed to help employees contain healthcare costs while providing a value-added benefit and money-saving vehicle for employees. The variety of FSA offerings - and their utilization by employers - continues to rise. According to industry sources, the number of U.S. employers offering FSAs is projected to increase from 56 percent in 2005 to 93 percent by 2010.
FSAs can exist as a stand-alone benefit or as part of a cafeteria plan. An important advantage is that both employee and employer realize tax savings, because the reduction in the employee's taxable earnings also reduces the employer's match on employee FICA tax. These programs allow participants to choose how much pre-tax money they want to contribute at the beginning of the plan year for eligible costs. However, funds not used by employees during the plan year are forfeit.
There are two types of Flexible Spending Accounts, healthcare spending accounts and dependent care spending accounts. Employers may offer one or both, but funds for each must be treated separately.
A healthcare FSA offers employees a way to pay for qualified health care expenses - including approved OTC and other medications - and budget their savings for future health care needs. Employees can contribute tax-free money to the FSA. Any money contributed by the employee helps to lower payroll costs by reducing the amount of Social Security and Medicare tax.
A Dependent Care FSA allows employees to set aside money for expenses such as childcare and adult day care. Contributions to a Dependent Care FSA are limited by law to no more than $5,000 per year. Employees can contribute tax-free money to the FSA. Any money contributed by the employee helps to lower payroll costs by reducing the amount of Social Security and Medicare tax.
Advantages of FSAs include:
- Tax-free contributions and earnings - Employees do not pay federal taxes on contributions or earnings, as long as the money is used for qualified health care expenses.
- Portability - Funds belong to the employee, which gives employees an incentive to spend their healthcare dollars cost-efficiently. Account holders are responsible for managing their funds responsibly.
- Flexibility in plan choice - An FSA can cover out-of-pocket costs for any health plan - they are not limited to high deductible ones. Employees who opt out of the employer's health plan can still sign up for an FSA.
- Covers expenses not covered by traditional insurance - Any service or product purchased in order to treat or mitigate an imminent or current medical condition is eligible - as long as that expense is not reimbursed by insurance or other means. For families struggling with the challenges associated with chronic illness, dependent care, or for working single parents, these accounts can be a lifeline.
Our Flex Plans are administered by prestigious third-party administrators Employee Benefit Corporation (EBC) and the Flexible Benefit Service Corporation. Our partnerships with these proven professionals will save your HR department time - and your company money by managing contributions and payouts for plan-enrolled participants.
