Are Flexible Spending Accounts An Affordable Option?
December 18, 2017
No one knows how the Affordable Care Act (“ObamaCare”) will pan out for 2018 and beyond. In the meantime, employers are having a difficult time offering affordable healthcare benefits to their employees. The timing is critical as healthcare costs continue to rise and employers must consider employee retention, recruiting, and productivity. Options may seem limited; you need more employees to contribute to a health saving account or existing employees to increase their contributions. Another option, obviously unpopular, is to reduce coverage.
A Flexible Spending Account (FSA) can benefit both employers and employees and it may be the option you’ve been looking for.
What is a Flexible Spending Account?
With a Flexible Spending Account, out-of-pocket healthcare expenses are covered with pretax dollars. Monthly contributions are taken from an employee’s salary before taxes are deducted and placed in a Flexible Spending Account. Since FSA contributions are subtracted from pre-tax income, they give employees a significant tax break.
And employers capitalize on that tax break as well. Essentially, employees reduce their salary in order to make contributions to their FSA. By doing so, they also reduce what they pay to Social Security and Medicare. Employers likewise reduce what they would be contributing to Social Security or Medicare on behalf of their employees.
In 2017, employees can accumulate up to $2,600 in their FSA per year. In 2018, the cap will rise to $2,650. Before 2013, FSAs were on a “use it or lose it” basis, but employees now have the option of a rollover plan of up to $500. (However, this rollover options does not allow a grace period.)
Employees can use these savings on any medical expenses that aren’t covered by their primary health plan, as well as some additional expenses besides healthcare. Eligible FSA expenses include:
- Health insurance deductibles
- Daycare expenses (called a “Dependent FSA”)
- Adoption assistance
- Medical care reimbursements
- Eyeglasses/eye surgery
- Physical therapy
- First aid
- Dental treatment
- Over-the-counter medication
Access FSAs Anywhere, Anytime
FSA funds are available 24/7. Employees can access their account information, transactions, and contributions online, on the mobile app, or with a prepaid benefits card. HR no longer has to process requests or spend time researching an employee’s account history – employees can manage their FSA from their own device on their own time.
How Can Employers Participate with FSAs?
Employer participation with FSAs is somewhat limited under the ACA. If there is no major medical health plan in place, employers can offer their employees only dental and vision health benefits. Additional coverage via the FSA is possible only through a group medical health plan. An employer can contribute up to $500 to the employee’s FSA or match their contributions dollar-for-dollar.
Are There Any Drawbacks to FSAs?
Employees do experience some risk with FSAs. For example, an employee may pledge to contribute a certain amount to a flexible spending account. At the beginning of the year, before their full pledged amount is acquired, they may experience a medical emergency and become eligible for the full year’s amount from their FSA. The employer must pay the amount and hope the employee stays with the company to make good on their original pledge.
Another precaution, FSAs must be carefully managed to ensure employees contribute the correct amount. Payroll paperwork can be a headache. That’s why most companies hire a third-party administrator to handle employee healthcare benefits.
At USA Payroll Inc., you get a complete suite of workforce benefit solutions that can save you time, maintain compliance, and reduce risk. If this is interesting or important to you, contact us and we’d be happy to discuss feasibility, potential business return, and if USA Payroll Inc. is the best fit for your organization.