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Flexible spending accounts (FSA) are a great way for employers to help employees reduce their taxable income and save for large medical expenses as well as everyday medical/health expenses. There are also FSA accounts to help employees save for childcare costs. FSAs are an excellent benefit to offer to your employees but can also be confusing. The following article will cover what you, as the employer, need to know about FSAs and how they work.

What Is a Flexible Spending Account (FSA)?

Flexible spending accounts (FSAs) are tax advantage accounts employees can use for approved expenses. There is one account for medical expenses (such as copays and prescriptions) and another account for childcare costs. These plans are available to any size employer. There is a nominal admin fee to employers (typically less than $5 per employee).

What Are the Benefits of a Flexible Spending Account (FSA)?

FSAs are a common benefit to add as an optional election for employees. Adding FSAs to your benefit offerings are a great way for employers to attract and retain talent. These benefits are loved by many employees for the reasons below.

  • Reduces employees’ taxable income. FSAs contributions are deducted from the employee’s paycheck pretax, which reduces their taxable income.
  • Saves money. With the FSA funds deducting directly out of employee’s paychecks, it makes it easy for employees to save for everyday expenses as well as large expenses (like pregnancy or surgery).

What Should Employers Know About Flexible Spending Accounts?

FSAs are great programs to offer employees, but since FSAs are governed by the IRS there are some rules to consider when putting an FSA benefit in place. After the benefit is active, changes to the plan setup can be made at the time of open enrollment.

Use It or Lose It

FSA accounts are funded for a plan year and use it or lose it when the plan year ends. There are some amendments employers can make to the plan below.

Roll Over

If allowed in your plan, you can roll $550 over to next year’s plan. These funds often aren’t available until March/April of the next year. This is not an option for Dependent Care FSA plans.

Grace Period

If allowed in your plan, you have 2.5 months into the new plan year to spend your balance from the prior year.

Plans cannot offer both a roll over and grace period.

Run Out Period

This is the amount of time that employees have to get your receipts in for reimbursement once the plan year ends. The run out time period varies, but the most common run out period is 90 days after the end of the plan year.

Nondiscrimination Testing

The IRS mandates annual testing to ensure that highly compensated employees (HCEs) are not benefiting from the plan. The IRS sets this amount, and in 2022, $135,000 and above is a highly compensated employee.These employees are able to participate in the plan, but must not benefit more than non-HCEs. Company owners with more than 2% ownership are not eligible to participate. The company you partner with for the plan will assist with testing.

How Does a Flexible Spending Account Work?

Flexible spending accounts are very, well, flexible! Employees decide how much they would like to contribute out of each paycheck up to an annual max that is set by the IRS (for 2022 the max is $2,850).

For dependent care, the max is $5,000 total per couple. FSAs do not have to run on a calendar year. They are typically set up to follow the same plan year as your other health benefits. It’s recommended that employees take some time to calculate the right amount for them and their family since the contribution cannot be changed without an IRS status change. Always keep documentation of your purchases (i.e itemized receipts) in case of an audit.

How Do Employees Pay for Medical Expenses?

Employees can either use their FSA card for purchases or pay out of pocket and submit a receipt for reimbursement. Many carriers have apps and make it super simple to be reimbursed. Many large stores like Amazon and Target notate online which items are FSA eligible.

What Happens to an FSA if an Employee Leaves Their Job?

Check the details of their plan, but often employees are forfeiting funds that were left in their FSAs if they leave their job. However, if an employee is enrolled in COBRA, they may be able to continue on the plans.

What if an Employee Has a Large Expense at the Start of the Plan Year?

A little known fact is that FSAs are fully funded at the start of the plan year. Even if an employee uses all the funds before the end of the year, they will continue to have deductions throughout the year.

Can Employees Make Mid-Year Changes to Their FSA?

No, not unless they have an IRS status change (such as marriage, divorce, birth/adoption of a child or spousal loss of coverage).

What Services and Products Can Be Paid for With a Flexible Spending Account (FSA)?

There is so much that can be paid for using an FSA. Employees can refer to the website of their plan carrier for an exact list. Below are some large categories of expenses an FSA will cover.

Medical

Copays, hospital fees, lab fees, prescriptions, and some over the counter medicines.

Vision & Dental

Copays, contacts and solutions, eyeglasses, and lasik.

Women

Feminine care items, breastfeeding supplies (ex. pumps and bras), and fertility treatments.

Childcare (DCFSA)

For children under 13, FSA can cover childcare expenses that parents incur while they are working. Licensed daycare centers, nannies/babysitters, and camps are eligible for coverage with an FSA. Eldercare is also eligible when employees claim the individual on their tax return.

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Questions You’ve Asked Us About Flexible Spending Account (FSA)

An HRA is funded by an employer and an FSA is funded by the employee through payroll deductions.
Unfortunately, no. During the COVID-19 pandemic, the IRS greatly expanded what could be reimbursed under an FSA plan, but that expansion did not include grocery expenses.

Megan has worked in the HR space for over 9 years and loves helping others. She has worked across various industries such as tech, government and most recently construction. When Megan is not working she enjoys hanging out with her family and hiking the many trails of Northern California.

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