A Flexible Spending Account is an Attractive Benefit

As your company competes in a challenging job market, an attractive benefits package is vital to recruiting and retaining top talent.

Among the available enhancements for companies of all sizes are consumer directed healthcare accounts. These allow your employees to put aside money pre-tax to pay for healthcare expenses. You may be familiar with health savings accounts (HSAs), bank accounts that:

• Are compatible with qualified high deductible healthcare insurance plans (HDHPs)
• Accumulate contributions and follow the employee through retirement
• Don’t require sponsorship by the employer

But what if your firm offers HMO, PPO or EPO health insurance plans with first-dollar coverage and/or without the HSA-qualifying high deductible? Employees who choose coverage under these aren’t eligible for an HSA. But with a bit of set-up and minimal expense, your company can offer them flexible spending accounts (FSAs).

FSAs can enrich your benefits package, increase employee satisfaction, and provide tax savings for both your company and your employees. This article covers health FSAs, but there are also dependent care FSAs, which help employees save on work-related childcare and, in some situations, even adult care for dependents.

Just like HSAs, FSAs allow employees to allocate pre-tax dollars for eligible health-related expenses, effectively reducing their taxable income. Given a few real-world examples to illustrate how to use an FSA, many employees tend to take advantage of this benefit.

Additional advantages for employers: Employee contributions to FSAs reduce the employer’s payroll taxes. Employer contributions, otherwise known as FSA credits, to employees’ FSAs are not subject to payroll taxes. This is a great perk to incentivize utilization and demonstrate the account’s benefits.

One particular FSA credit strategy that works well to drive employee participation is a matching FSA credit. Just like a 401K match incents employees to save for their retirement, an FSA matching credit incents employees to participate in the FSA and save tax dollars on their out-of-pocket health expenses.  

There are a few important features that employers and their employees should know.

• FSAs are (mostly) use-it-or-lose it. Unlike HSAs, which accumulate contributions year after year, participants forfeit any unspent FSA funds each plan year. Some of this participant risk is diminished if the employer offers a grace period or rollover (more on that below). Good news: Forfeited funds may be used by the employer to administer the FSA program. Roughly half of FSA accountholders forfeited funds to their employer in 2022.
  
  
• Employees decide their annual contribution at the beginning of the year, up to the IRS maximum. Equal increments are deducted from each paycheck to total that amount. Unlike HSAs, employees can’t change their contributions mid-year unless they experience an IRS-recognized qualifying event such as getting married or divorced or having or adopting a child.
  
  
• Employees have access to their elected annual total at the start of the year due to the Uniform Coverage Rule. This is a valuable benefit to employees that have an unexpected healthcare expense before they have accumulated enough funds in their FSA.
  
  
• Employer sponsors have the option to offer rollover or a grace period. Rollover allows participants to carry over a portion of unspent funds from one FSA plan year to the next, up to an IRS-maximum allowed amount (currently $660 for FSA plan years beginning in 2025). A grace period is additional time for participants to continue to incur expenses and use their remaining balance (up to a maximum of 2 months and 15 days after the plan year is over). Employers can’t offer both a grace period and rollover; they can offer one or neither.
  
  
• Employees who leave or retire do forfeit remaining funds, but employers typically offer a runout period for terminated participants to file receipts for reimbursement. Terminated participants who have a positive account balance at the time of termination and who qualify for COBRA can elect to extend access to their FSA if they pay their normal monthly FSA contribution plus a small COBRA surcharge on a post-tax basis.

If you're interested in discussing consumer directed healthcare accounts of any type to enhance your employee benefits package, reach out to your financial advisor.

Jamie Rorrer is a Health & Benefits Advisor for Pinnacle Financial Partners, based in North Carolina. He can be reached at jamie.rorrer@pnfp.com.

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