Flexible Spending Account (FSA) Benefits From Paychex

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.

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
• Prescription drugs from another country

Health care FSAs cover over-the-counter drugs and remedies. Some examples of FSA-eligible items include:

• Indigestion medications
• Eye drops
• Laxatives
• Pain relievers
• Sleep aids
• Acne medications
• Diaper rash ointment
• Ointments for minor injuries

If you wish to offer employees an FSA account plan, the timing of your decision is imperative. Ideally, your new FSA should be ready to go before the following year's open enrollment. This will allow employees to do their research and make their plan elections accordingly. If you currently offer an FSA and need to amend your plan, be sure to communicate any changes to participants.

Employees should attempt to project their reimbursable healthcare expenses for the year and decide if it makes sense to set aside money each pay period to cover them. That’s because they should avoid losing contributed funds when they don't have the necessary medical expenses. Looking back at past years' expenses can help determine if enrolling in the company’s healthcare FSA plan makes sense.

Although not required, employers have two options they can institute to help employees take advantage of all the money they’ve contributed to their healthcare or limited purpose FSAs.

• Allow employees to carry over up to $610 of unused health FSA money at the end of the year to apply to the next plan year (remaining funds in excess of $610 are still forfeited to the plan); or
• Elect a grace period to permit employees to use their unused account balances to pay for medical costs incurred during the first 2.5 months of the following plan year (up to March 15 for calendar year plans) before they must forfeit the money.

Before making a final decision, employers should carefully weigh health care or limited purpose FSA benefits or any insurance benefit account and understand the administrative requirements of a carryover or grace period option.

Both options are intended to reduce “wasteful” end-of-year spending as employees hurry to spend their health care or limited purpose FSA accounts rather than lose the money. Employers are not required to offer either option, in which case the “use it or lose it” rule will still apply. But if you offer one of these options to your workforce, you must pick only one, as employers cannot allow employees both a carryover and a grace period for the health or limited purpose FSA. You may wish to review any available data on current FSA utilization before deciding which option would work best for your company’s workforce. Once you make your selection, notify employees as soon as possible to give them enough time to make an account selection and adjust their medical spending as needed.

If you want employees to take full advantage of an FSA benefit, you must strive to communicate how they can best use the plan clearly. A well-drawn FSA employee benefits communication strategy can enhance your employees' understanding of enrolling in the plan and receiving the maximum benefits. While information on FSA accounts should be included in open enrollment, it must also be provided to new hires when they become eligible for employee benefits. FAQs and other health plan information may also be provided online via a company benefits portal. Remember that employees' communication preferences may vary, so you may want to make this information available in print and digital formats.

Communication efforts about an FSA should be easy to understand and designed to educate employees on the advantages of this benefit account. An FSA quick reference guide listing common items employees can use their FSA funds to pay for is also helpful. You can also provide commonly asked questions, key enrollment dates, and examples that break down different cost scenarios. You'll also want to remind employees about any FSA spending deadlines and clearly explain the carryover or grace period options made available to them, including specific dates and deadlines.

If you're not currently offering an FSA, this can bring tax savings for both you and your employees and provide a much-desired add-on to your health benefits. Paychex offers assistance with FSA implementation, ongoing administration, and the development of employee communications to encourage participation.

Regarding ownership of an FSA, the account owner is the employer. If an employee is terminated or is no longer eligible to participate in the FSA, unreimbursed contributions may be forfeited.

Except for Medicare premiums, FSAs cover many of the same qualified medical and dental expenses as an HSA. Review IRS Publication 502; for a detailed list of what is and isn’t covered.

Does an HSA allow employees to use pretax dollars? Is FSA pretax? While both an FSA and HSA allow enrollees to save money to pay for qualified medical expenses before taxes are taken out, these arrangements have fundamental differences. Most notably, HSAs require enrollment in a qualifying high deductible health plan (HDHP), belong to the employee, funds are not subject to “use-it-or-lose-it,” and the individual can take the account with them if they leave the company. Conversely, an FSA is owned by the employer. Get more details about the differences between FSAs, HSAs, and HRAs.

A company that does not offer a group health insurance plan generally cannot offer an FSA unless the FSA qualifies as an excepted benefit.

To create a robust employee benefits strategy and maintain compliance, it is imperative to factor in flexible spending account employer rules. To start, employers should understand IRS guidelines and create a clear plan that outlines the terms, eligibility criteria, and limitations of their FSA accounts. Communicate aspects such as eligible expenses and FSA employer contribution limits to employees so everyone is on the same page. Also, file the required forms, perform periodic audits, and confirm dependent eligibility when necessary.

Yes, an FSA for small business owners is possible. Consider if the benefits of an FSA account align with your priorities and are something you want to offer employees. If these things align, a benefits broker or an FSA provider for small businesses can help you provide this to employees, allowing them access to affordable healthcare and tax savings.