It's no secret that flexible savings accounts (FSAs) are highly valuable to employees. These voluntary plans allow enrolled workers to use pre-tax dollars (an annual maximum of $2,700 for 2019) to pay medical expenses not covered by their health insurance. If your business offers group health insurance, you can offer your workers an FSA benefit.
It is up to eligible employees to decide how much they want to contribute to an FSA using payroll deductions. Most employees find it useful to tap FSA funds to pay for eligible out-of-pocket health care costs such as co-pays, prescription medications, vision care and dental work for themselves, their spouse and eligible dependents. Because participants use pre-tax funds, they decrease their taxable income.
Employers may choose to subsidize or match workers' FSA account contributions. Employer contributions to a health FSA generally do not count toward the contribution limit, unless employees elect to receive the employer contributions in cash or as a taxable benefit.
What items do FSAs cover?
Typically, participants use an FSA to reimburse themselves for co-payments and other out-of-pocket, non-covered medical expenses. Most dental expenses also qualify, such as costs for non-cosmetic orthodontics and extractions. Other items commonly covered by FSAs include:
- Eyeglasses/contact lenses;
- Laser eye surgery;
- Medical monitoring devices;
- Walking assistance devices;
- Wheelchairs and repairs; and
FSA participants pay for approved items or services with an FSA debit card, or use an account reimbursement service when they submit substantiation for eligible expenses. However, FSAs don't cover everything. Participants cannot use their account funds for:
- Cosmetic surgeries provided for reasons other than correcting congenital deformities, disease disfigurement, or to correct personal injuries that result from accidents or trauma;
- Childbirth class expenses for the coach (those for the expectant mother are covered);
- Exercise equipment for general well-being;
- Marriage counseling;
- Special foods that represent normal consumption and satisfy nutritional requirements;
- Treatments from alternative providers;
- Personal care items;
- Infant formula;
- Funeral expenses;
- Payment of insurance premiums; or
- Prescription drugs from another country.
FSAs will cover some over-the-counter drugs and remedies only when prescribed by a medical doctor. Examples of these include:
- Indigestion medications;
- Eye drops;
- Pain relievers;
- Sleep aids;
- Acne medications;
- Diaper rash ointment; and
- Ointments for minor injuries.
Carryover and grace period options
FSAs require that enrollees must incur eligible expenses by the end of the plan year or forfeit any unspent amounts to the health insurer. Those who find themselves with FSA money at year-end often rush to use it. The Internal Revenue Service (IRS) offers carryover and grace period options to reduce hasty, indiscriminate spending. Employers can choose either FSA-extension option, but not both.
Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year. For example, an employee with $500 of unspent funds at the end of 2018 would still have those funds available to use in 2019. Under the grace period option, an employee has two-and a-half months after the end of the plan year to incur eligible expenses — for example, March 15, 2019, for a plan year ending on Dec. 31, 2018. Employers can also opt to offer neither option.
What are the differences between FSAs and HSAs?
FSAs are not the same as health savings accounts (HSAs), although the two have similarities. Both allow enrollees to save money to pay for qualified medical expenses with pre-tax dollars, but there are key differences between these arrangements.
- Are established by an employer.
- Are usually funded by pre-tax funds from payroll deduction, but employers can also contribute.
- Can be used with any type of health coverage, although insurance is not required.
- Call for forfeiture of funds not used by the end of the year — or by March 15 of the following year if the employer offers a grace period. Employers may also choose the carry-over option (see above).
- Require that contributions come from each paycheck throughout the year, but the full annual contribution amount is available for use immediately (or after the first contribution). If the employee uses the full amount and then quits or is fired before year-end, he/she does not have to repay FSA funds to the employer.
- Can be set up by a company or an individual, but only in conjunction with an HSA-qualified high-deductible health plan (HDHP).
- Permit contributions only while the account holder is covered by an HDHP, but the funds can be used without taxation for qualified medical expenses any time in the future, even if the individual no longer has HDHP coverage.
- Can be funded with pre-tax dollars by employee payroll deductions, employer contributions or by an individual.
- Have a maximum 2019 contribution limit of $3,500 for a person with individual HDHP coverage, and $7,000 for family HDHP coverage.
- Are portable — they go with the employee, regardless of whether the worker or the business made the HSA contributions.
- Don't require a use-it or lose-it onus for funds each year — unused money remains in the account.
Can I have an FSA and HSA account at the same time?
Under certain circumstances an employee can have both an FSA and HSA account. This is permissible when the individual has:
- A limited-purpose health care FSA — generally just for vision and dental expenses; or
- A post-deductible health FSA that does not pay or reimburse any medical expense incurred before the annual deductible is satisfied.
The IRS permits employers to offer both FSA and HSA accounts, as long as the FSA is limited-purpose.
Employer advantages of offering an FSA
Businesses that include an FSA in their benefit plan gain a number of advantages. Because enrolled employees reduce their taxable income with FSA contributions, their employers pay less in Medicare and Social Security taxes (FICA taxes). The more employees who enroll, the more savings for the company.
FSAs enhance one of the benefits employees value most: health care coverage. The benefit allows employers to help their workers and their dependents pay for health expenses not covered by the group insurance plan — a benefit that contributes to employee retention, morale, and loyalty.
If you’re looking to help your employees save for health care expenses while also saving on taxes, consider leading FSA plans currently available on the market.