What is an FSA (Flexible Spending Account)?

There are several different tax-favored health plans available in the US. Your employer may choose to offer one as part of your employee health benefits, but exactly which plan will vary for each company. An FSA is a Flexible Spending Arrangement or Flexible Spending Account, which allows employees to be reimbursed for qualified medical expenses.

What is an FSA

An FSA is an employer-established benefits plan. Often, it is offered as part of a cafeteria benefits plan. If you’re not familiar with this term, it’s an HR solution that allows companies to offer a range of benefits options to employees, who can choose to invest in a way that works best for them individually. It can include different health benefits options or other insurance options, such as short-term and long-term disability insurance, life insurance, or retirement investments.

Employees should understand the specific plan offered. This introduction to FSAs references the IRS restrictions on plans, but companies may have plans that are more restrictive than the IRS rules.

Benefits of FSAs

The main benefit of an FSA is the fact that it is a tax-advantageous account. The money contributed by employees is pre-tax dollars, meaning employees do not pay federal income taxes on this money. For employers that also contribute to employee FSAs, that money can be excluded from gross income. When an employee uses the funds in an FSA to pay for qualified medical expenses, the withdrawals are tax-free. If you’re taxed at the 22% income tax bracket, you would not pay income taxes on your FSA contribution. If you contributed $1000 during the year, $220 would remain in your FSA instead of going to the IRS in the form of taxes. Although there are different expert opinions on the need for an FSA, even healthy people have health care expenses on a yearly basis, such as dental cleanings or prescriptions. Over-the-counter drugs are not a qualified reimbursement, but you may be able to get a prescription for some drugs which would be covered. For example, allergy drugs can be both OTC and prescribed, which makes a difference when you have an FSA.

How does it work?

At the beginning of the plan year, employees must choose how much money they want to contribute to an FSA. The employer will deduct the amount from pay, which is typically done on each paycheck. As an example, if I decided to contribute $1200 over the year and I was paid twice a month, my employer would deduct $50 from each pay. Changes to the contribution amount can only be made as per the plan rules, typically for life events specified in the plan and during the re-enrollment period.

The FSA maximum contribution for 2019 (i.e. how much an employee can contribute) is $2,700. The dependent care FSA maximum is $5,000. Married couples have a $5,000 maximum, even if they have separate FSAs. It is important for employees to understand the annual maximum. There are tax penalties for over-contributing.

Types of FSAs

There are different account types available for employers to choose from. The most common FSA is health care FSA. Dependent care is also a popular choice.

1. Health care FSA: this is the most common FSA account and is offered by employers who don’t have plans that qualify for an HSA.
2. Limited-use FSA: this is an FSA offered by companies that also have an HSA. The account is more limited with regard to the types of expenses that can be reimbursed. They are limited to dental and vision coverage only.
3. Dependent-care FSA: this is a separate FSA that can be used for childcare, eldercare, and care for adults who have special needs. Employees can have both a medical FSA as well as a dependent-care FSA. It is also important to note that they have different contribution limits.

Plan ahead to maximize plan benefits

FSAs are “use-it-or-lose-it” plans. At the end of the plan year, the money left in the account is no longer available to employees. For this reason, employees should balance the amount invested in the FSA with anticipated medical costs. Plans may have a grace period or carryover amount, but not both. It is critical that your HR solutions team understand how the plan works and design training for employees to understand this aspect of an FSA.

• A grace period allows employees to use the funds leftover for up to 2.5 months after the plan year
• A carryover provision allows that employee to carry over up to $500 of unused contributions to the following year.

Reimbursement

There are generally two ways you can use an FSA to pay for medical expenses. You can pay for the expense out of pocket, then submit receipts to the insurance company for reimbursement. This is the most common way to use an FSA. Some insurance companies will provide account holders with a debit card that they can use for qualified expenses. This is convenient, but these cards are restricted since they can only be used for some expenses. You might have to pay out of pocket and get reimbursed at a later time.

 Facts About FSA

It is important to understand the FSA plan rules when you sign up. If your spouse also has health insurance through work, it is important to understand both plans and how they interact because plans may be incompatible. For example, FSAs and HSAs cannot be used by the same person. Even if you are not covered under your spouse’s health benefits, money from the FSA and HAS can be used on eligible dependents. The rules around health care plans are complex. Employees should be encouraged to speak with the benefits administrator if they have questions.

If you stop working for your employer, you will also lose your FSA and expenses you incur after the termination date would not be eligible for reimbursement. You may be able to continue coverage if you choose COBRA continuation coverage and pay for the premiums.

 

For more information please contact Mike Moncada:  516.599.2120 ext. 114 or mike@vantagepointbenefit.com.