Many employees appreciate the possibility to deposit pre-tax income for dependent care expenses and medical expenses as part of the benefits deal that they receive from their companies. An FSA or Flexible Spending Account gives your employees the ability to put aside a fixed amount of tax-free dollars from their salary to use for eligible health care benefits. Employees can also use their Flexible Spending Accounts for incurred health care expenses that insurance does not cover.
An FSA not only helps employees save on taxes, but also helps your company to reduce the amount it pays in FICA taxes each year. When your employees contribute to their FSA on a pre-tax basis, your company can save approximately 8% on every dollar contributed. Both employers and employees are not familiar with the FSA so we have listed some of the commonly asked questions to help you understand them better:
Will all employees be able to participate in the FSA Plan?
Definitely. However, the employer has the power to exclude certain employees based on the minimum age requirement, the number of hours worked, as well as a waiting period for new employees. Members of a bargaining unit (including certain family members) may also be excluded.
Are all owners able to participate in the FSA Plan?
No. Those who are not eligible to participate include: 2% or greater S-Corp shareholders (including family members), sole proprietors, and partners in a partnership.
Is it true that an FSA require non-discrimination testing?
Absolutely. There is a yearly requirement for non-discrimination testing that targets the company’s Key and Highly Compensated employees. An IRS 5500 form is only needed if more than 100 of your employees are taking part in the plan at the start of the year.
Do COBRA continuation requirements affect the FSA?
Yes. An employee can enjoy access to COBRA if the sum of money they have been reimbursed is less than the sum of money they have paid for plan-to-date when the Health FSA meets the requirements for the Special Limited COBRA obligation. FSA COBRA premiums are equivalent to the monthly contribution made by the employee, with the addition of a 2% administrative charge. The employer can choose to stop COBRA coverage if the employee defaults on the premium payments.
Can an FSA be implemented by an employer who has an HRA?
Yes. In fact, the benefits can complement each other. However, the employee cannot make a claim for the same medical expense by using both a Health FSA and an HRA. If the same type of expense is both covered under the two accounts, then you need to refer to the HRA Plan Document regarding the specific ordering rules.
Can the FSA account of an employee be funded by the employer?
Absolutely. The employer can fund the employee’s account at every payroll dispensing period, every month, every 3 months or every year. This contribution can come as a fixed dollar or match amount. However, do note that the employer has to make consistent contributions to all eligible employees.
Can you contribute to your FSA and HSA at the same time?
No, you will not be able to do so. You have the option of taking part in either a post-deductible or limited-purpose FSA (for dental, vision and preventative services) while contributing to an HSA; otherwise participating in a general-purpose FSA precludes you from taking part in an HSA.
Do you have more questions to ask about FSA? We at TRAXPayroll can answer them!