1. What is an FSA?
An FSA is an employer sponsored plan that allows employees to voluntarily put aside pre-tax dollars to pay for eligible out-of-pocket medical expenses, i.e. co-pays, deductibles, and uncovered expenses. An eligible employee makes an election at the beginning of the plan year (within plan guidelines). This election is deducted from their pay, BEFORE federal, state, or FICA taxes. Since this in effect reduces the employee’s pay, the employer does not pay their portion of FICA Taxes. Cool, huh! Employee and employer both save money on taxes.
2. The election the employee puts aside – where does it go?
This will depend who the employer selects to administer the plan. The employer can administer the plan themselves, but this can be cumbersome and could create liability if you have access to personal health information. Generally, whoever helps develop the plan for you will offer competitive solutions to administer the plan. Our firm uses a local provider, but there are many providers available. Many payroll companies offer such plans these days.
3. How does the employee use the funds put aside?
Once the employee has incurred a qualified out-of-pocket medical expense, they submit a claim form to the TPA; the TPA will then reimburse the employee within 7-14 days (by direct deposit or check). The employer could also opt for a plan that allows employees to receive a debit card which they can use instead of submitting a claim. Debits cards can only be used at qualified providers, i.e. doctors’ offices, pharmacies, etc. and are worth the amount the employee elected at the beginning of the year.
4. Are all out-of-pocket medical expenses qualified for reimbursement?
The IRS has a comprehensive list of qualified medical expenses that are eligible for reimbursement. Some examples are co-payments, co-insurance, medication, dental services, vision services, lab fees, and certain medical supplies. Insurance premiums are not reimbursable.
5. What’s this use-it–or-lose-it clause?
Following IRS plan guidelines, unused funds are forfeited at the end of the plan year. Therefore, it is important for employees to do their due diligence when setting up their annual allowance. However, note there is a grace period of 2½ months after the end of the plan year in which the employee can submit claims for the prior plan year. The employer is not permitted to refund unused balances.
Flexible Spending Accounts (FSAs) are a good thing for employers AND employees. If you don’t already have an FSA plan in place, be sure to talk to us to see if this might be a good solution for your business. If you already have a plan, be sure to check that the participation levels are still a good fit.
