Today, offering a well-rounded benefits packages that takes employees’ wellness needs into consideration is a competitive advantage for employers. And in this era when healthcare costs are soaring, providing a Health Flexible Spending Account (FSA) is a meaningful way for employers to boost employees’ capacity to pay for out-of-pocket health-related costs. FSAs work by providing employees with an opportunity to defer a portion of their income into a tax-free account that can then be used to cover qualified medical, dental, and vision expenses, as well as certain over-the-counter drugs, equipment, and supplies. This means that employees can reduce their taxable income while also knowing exactly how much money they have set aside for managing their portion of healthcare costs.
Eastern Insurance Group has compiled a few facts to help plan sponsors and risk managers better understand how FSAs work and the value they represent to employees. The information below may be useful for employers deciding whether they want to introduce an FSA benefit as well as those who want to promote employee participation in a plan they already offer.
FSAs are governed by the Internal Revenue Service (IRS). The IRS allows employees to set aside pre-tax deductions from their paycheck taken in equal amounts from each paycheck over the plan year. For the 2023 plan year (2024 limit has not yet been released), employees can contribute up to $3,050 with the exception of employees over age 55 who are able to make an additional $1,000/year catch-up contribution. A third-party administrator typically manages the plan for the employer and usually provides plan documents for the employer to have on file.
FSAs can be a powerful benefit for families. FSAs are associated with individuals, so even if spouses work in the same company, both are eligible to contribute the maximum amount to the plan. Families anticipating high, qualified medical expenses may wish to consider taking advantage of this opportunity.
Annual limits are tied to individual plans. Annual contribution limits are tied to plans, not people. That means that should an employee leave their job during the plan year and move to another employer who offers an FSA, they are eligible to contribute the maximum annual amount within the new plan, regardless of their previous contributions.
Unspent money remains with the plan. For many years, FSAs were “use-it-or-lose it.” Employers can now elect to allow a grace period of 2.5 months after the end of the plan year or a “carry over” option. If an employee hasn’t incurred enough eligible expenses to empty their account at the end of the employer-specified time frame, the balance reverts to the plan. Likewise, if an employee leaves their job, regardless of the circumstances, unspent contributions stay in the plan, unless the employee is eligible for and elects continuation coverage through COBRA. Most plans allow a specified time (often between 30-90 days) to submit claims for reimbursement of services that took place prior to the termination date.
Carryover option. As mentioned above, some employers choose to offer a carryover, or rollover option, which allows employees to spend their FSA balance beyond the 12-month plan year. This plan feature is attractive for employees concerned that their eligible medical expenses may be lower than initially anticipated, because their cash balance will be rolled into the next plan year. The amount eligible for carryover is adjusted by the IRS. The current amount allowed for plan years that started in 2023 is $610. The 2024 amount has not been released yet.
Participation isn’t connected to enrollment in the company’s medical plan. If an employee is covered under a spouse's, parent’s, or national medical plan, they can still elect to participate in their company’s FSA. This means that qualified expenses incurred by the employee or their family can be reimbursed through the FSA even when they’re not enrolled in the company’s medical plan.
The election is available whenever it’s needed. Sometimes large medical expenses hit all at once. Employees can access, without penalty, the full annual election amount whenever it is needed to cover eligible expenses—even as early as day one of the plan year.
How employers benefit from offering an FSA. Employers will find few downsides to offering an FSA as part of a robust benefits package. In fact, providing the mechanism to pay out-of-pocket, qualified medical expenses with tax-free contributions is an effective way to create a culture that supports health and wellness, which is crucial for retaining and recruiting today’s employees. Additionally, an FSA allows employers offering the benefit to save the combined Medicare and Social Security tax rate of 7.65% on the total value of employee contributions.
For more information about FSAs, contact your Eastern representative. If you don’t already offer one, we can help you determine whether or not an FSA makes sense as part of your overall benefits package. And if you already include an FSA among your benefits, we can provide insights into specific issues such as potential participation conflicts between FSAs and Health Savings Plans. We’re want to help you make the most of all of your employee benefits. Call 800-333-7234 or email [email protected] today.