Industry Articles

Flexible Spending Accounts

In the competitive world of business, employees are adopting a take-charge attitude when it comes to portfolios and 401(k). This new attitude has also translated itself into the world of benefits with the addition of the FSA. Flexible Spending Accounts (FSA) allow employees the ability to purchase certain benefits, such as dental or medical, on a pre-tax basis. Employees fund their FSA by voluntarily and irrevocably reducing their gross pay by an amount specified by the employee. The amount deducted from an employee’s gross pay is to the discretion of the employee. Any money that is designated to pay for qualified expenses in an employee’s FSA is reimbursed upon submission of proper documentation. Here are some key points that are important to know about flexible spending accounts.

  What are qualified benefits under FSA?

Qualified benefits are the tax exempt benefits that are paid with pre-tax dollars. These benefits include medical expenses not covered by the health plan (deductibles and co-payments) and dental or vision benefits.

Recently, the federal government ruled that FSA participants may use pre-tax dollars to purchase over-the-counter (OTC) drugs if allowed by their FSA plan. The OTC drugs must be for the use of curing a current illness, not the general well-being of an individual.

  What happens to the employees’ money not used during the plan year?

Any money that remains in the employee’s account at the end of the plan year becomes the property of the employer. The employer can use this money at his discretion. If the employer does wish to return unused money to the employees, the money must be returned to all FSA participants on an equitable basis.

  What are the general advantages of using FSA?

Employees can reduce their taxable income and use the income reduction to pay for expenses that otherwise would have been paid with after tax dollars.

Tax savings include federal income tax, and in many jurisdictions, state and local income taxes.

Employees do not pay Social Security and Medicare tax (7.65%) on the amount excluded from income.

  What are the employer advantages of employees using FSA?

There is a reduced contribution to Social Security and Medicare that employers will have to make due to decreased salaries caused by FSAs.

Salary reductions may also result in employer savings pertaining to unemployment and workers’ compensation, short and long-term disability coverage, life insurance, and pension.

Employers can earn investment income on the value of the FSA account balances.

  What are the employee disadvantages of using FSA?

Benefits that depend on salary amounts may be severely affected by salary reductions brought about by using a FSA. This may result in the following receiving lower benefit amounts:

• Pension
• Life Insurance/Disability
• Workers’ Compensation/Unemployment
• Social Security

 

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