Flexible Spending Accounts (FSAs)
- What is an FSA and how does it work?
- An FSA is an employer-sponsored spending account that allows employees to set aside pretax earnings to pay for eligible health care or dependent care expenses. Pretax funds are deducted from each paycheck and automatically deposited into an FSA account. Employees decide how much to contribute, tax-free, for the year.
- What are the benefits of an FSA to employees?
- Pretax contributions lower taxable income, and reimbursements are made tax-free from the employee’s account. In addition, an employee has access to the entire elected amount on the first day of the plan year.
- How do employers save money?
- FSA programs can lower employers’ FICA taxes on employee payroll and possibly what is paid for other benefits plans, such as workers’ compensation and disability, that are based on employees’ taxable income.
- What types of FSAs are available?
- There are two types of FSAs employers can offer to employees. Employees can participate in one or both.
- Medical FSA — Allows employees to pay for eligible expenses not covered by the health plan, such as deductibles, coinsurance, dental care, orthodontia and vision care. The total amount the employee chooses to contribute is available to them on the first day of the plan year, even if they have not contributed that much yet.
- Dependent Care FSA — Allows employees to pay for day care expenses for their children under age 13 or for older dependents not capable of self-care needed to allow an employee to work. The money must be contributed to the employee’s account before they can request reimbursement.
Per the IRS, the following limits apply:
Medical FSA Dependent Care FSA Employee contribution maximum: $2,750 Employee contribution maximum: $5,000
Depending on their tax bracket, an employee can save nearly 30% on most medical, health, and child or elder care expenses. An employee earning $30,000 with a $2,000 FSA contribution can save an estimated $300 in taxes.
- How is an FSA funded?
- Employees make pretax contributions through automatic payroll deductions. Employers can also decide to contribute, up to a maximum amount.
- What is the main difference between an FSA and an HSA?
- With both an HSA and a FSA, account holders make tax-deductible contributions. HSAs are individually owned while FSAs are owned by the employer.
You keep your HSA balance until you spend it and the account belongs to you even if you switch employers or retire. With an FSA, any money in the account at the end of the plan year is forfeited to your employer.
- Due to the COVID-19 relief bill signed in December 2020, employers have the option to allow all unused FSA funds to rollover from a 2020 plan into 2021 and from a 2021 plan into 2022. Employers also have the option to allow a 12-month grace period for 2020 and 2021 plans. Check with your employer to determine whether your plan allows either of these options.
Anyone can contribute to your HSA account. An FSA must be funded exclusively through employer contributions or employee pre-tax contributions.
- Is a debit card available?
- Yes. A Visa® debit card is available for eligible medical expenses, and can be used at the point of purchase or after care.
- What happens to FSA funds at the end of the year?
- Unused money in an FSA is handled in one of three ways, based on the plan design for the group:
- Forfeited at the end of the plan year
- Rollover of up to $570 of the balance to the next plan year. Remaining balances are then forfeited.
- Grace Period allows expenses in the first few months of a new plan year to be paid with old plan year funds. Remaining balances are then forfeited.
- What happens when a terminating employee's reimbursements exceed contributions for that year?
- Employees have access to the full annual FSA election amount at the beginning of the year, so there's always a risk that an employee could use their FSA allotment and terminate before they've fully funded the account through payroll contributions. Just as employees risk forfeiting their money if they don't spend it in time, employers risk this money if the employee terminates before their contributions have caught up to their reimbursements.
Employers may not withhold additional funds from the employee's final paycheck to make up for those funds, and the employer also cannot send the employee a bill to recapture those funds. Additional payroll contributions beyond the final paycheck can only be made if the employee elects to continue their plan through FSA COBRA.