A flexible spending account (FSA) is an individual account that can reimburse an employee for qualified medical expenses and work-related dependent care expenses.
Is offering an FSA plan worthwhile? Let’s look at some of the pros and cons for both employers and employees, as explained in the new International Foundation Flexible Spending Accounts (FSAs) elearning course.
Pros and Cons for an Employer
An employer may favor offering an FSA for the following advantages:
- FSAs give employers flexibility in designing the plans as long as they are compliant with federal laws and regulations regarding contributions, reimbursements, claims substantiation and other administration issues.
- Health care FSAs (HCFSAs) provide a reduction in employer payroll taxes.
However, an employer takes on the following risks when offering an FSA plan:
- Under the uniform coverage rules, the employer is required to reimburse expenses that occur during the coverage period up to the participant’s annual election amount without regard to the participant’s account balance. If a participant terminates employment or loses eligibility, the employer cannot recoup those funds reimbursed in excess of the amount that the employee deposited to date.
- FSAs may require more employer administration than HSAs and HRAs.
FSA Pros and Cons for an Employee
From an employee perspective, one of the biggest advantages of participating in an FSA is the tax-free nature of the account.
- Employee and employer contributions are not included in an employee’s gross income and qualified expenses are paid or reimbursed on a tax-free basis.
- Aside from substantiating claims as they are incurred, a participant is not required to file any additional forms at tax time (except Form 2441 for dependent care FSA participants).
- HCFSAs can be offered in conjunction with any type of employer-sponsored group health plan, whereas HSA participation is strictly limited to those who are enrolled in a qualified high deductible health plan (HDHP) and no other disqualifying coverage.
The following aspects of flexible spending accounts may be less favorable from the employee perspective:
- Because FSA design and plan options vary from employer to employer, an employee needs to learn about the features of their particular FSA plan to understand how to use it correctly.
- HCFSAs have the lowest annual contribution limits compared to HRAs and HSAs.
- Compared to HSAs and HRAs, employers are least likely to contribute to an HCFSA.
- FSAs are subject to the use-it-or-lose-it rule unless the employer adopts a grace period or carryover provision when available. This means employees must be especially thoughtful and anticipate future medical expenses when setting annual elections.
Many factors should be weighed before implementing an FSA plan. The International Foundation offers helpful e-learning courses that provide a deeper dive into FSA, HSA and HRA plans. Tap into these courses to learn about plan design, compliance requirements, tax advantages, reimbursement rules, claims substantiation and other administration considerations.
Ann Godsell, CEBS
Director, Professional Development Marketing at the International Foundation
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