A flexible spending account, or FSA, is set up by an employer to help employees pay for out-of-pocket expenses, such as healthcare and dependent care expenses.
Each month, employees are able to contribute a portion of pre-tax money to the account, and employers can also contribute. A flexible spending account is a great way to enhance your employee benefits package and attract top talent.
How to Set Up a Flexible Spending Account:
1. Establish FSA eligible expenses.
Before you set up a flexible spending account, consider drafting an FSA policy to determine how your company will verify eligible expenses if an employee decides to withdraw from the account.
2. Hire a neutral administrator.
Select a third-party administrator to help set up a flexible spending account on your behalf. You can do it yourself, but this would take a lot of time and effort to plan - a luxury that most business owners do not have. You also want to ensure that your employees' personal information remains private so that there is no room for conflict between management and staff.
3. Keep track of contributions.
Make sure that your company is able to accurately record each employee's individual account as claims are submitted, paid, or rejected.
4. Explain the plan to your employees.
When you onboard new employees, you should have an FSA document that outlines the plan for them and explains how they can participate.
Best Flexible Spending Account Providers:
American Benefits Group
Bank of America
ADP Flexible Spending Account
Flexible Spending Account FAQs:
What is a flexible spending account?
The definition of a flexible spending account is: "a tax-advantaged financial account that allows you to save on payroll tax and pay for healthcare and dependent expenses." An FSA is also known as a spending arrangement, health care flexible spending account, and a dependent care flexible spending account.
How does a health care flexible spending account work?
A health care FSA allows you to pay for qualified healthcare or dependent care expenses not covered by other health plans. If an employee needs to make a deduction from their health savings account, they can use a debit or credit card and submit their receipts for reimbursement. FSA funds are available immediately. Every year, the IRS sets a limit on how much an employee can contribute. For 2019, the FSA limit is $2,700.00.
Do I have to provide a flexible spending account?
There are no laws that require you to offer a flexible spending account but many companies do provide FSAs as a benefit.
What happens to FSA funds that aren't spent?
Under the "use-or-lose" plan, employees must use funds from their healthcare savings account by the end of the year or forfeit the entire amount. Employers can choose to offer a flexible spending account rollover, which allows an employee to carry over up to $500.00 for the following plan year.
What is the difference between a FSA and a HSA?
Both an FSA and Health Savings Account (HSA) are tax-advantaged accounts, but there are key differences between the two. FSAs can only be opened by an employer and contributions are made via pre-tax deductions. With a HSA, contributions can only be made if an employee is covered by a high deductible health plan.