Why You Need an FSA
What is an FSA and What Does it Do for Me?
With an FSA You Get the Following Benefits:
- With an FSA, you elect to have your annual contribution (up to the $2,750 limit set by the IRS) deducted from your paycheck each pay period, in equal installments throughout the year, until you reach the yearly maximum you have specified.
- The amount of your pay that goes into an FSA will not count as taxable income so that you will have immediate tax savings.
- A Healthcare FSA allows reimbursement of qualifying out-of-pocket medical expenses.
- A Limited Purpose Medical FSA works with a qualified high deductible health plan (HDHP) and Health Savings Account (HSA). A limited FSA only allows reimbursement for vision and dental expenses.
- A Dependent Care FSA allows reimbursement of dependent care expenses, such as daycare) incurred by eligible dependents.
- Enjoy significant tax savings with pre-tax deductible contributions and tax-free reimbursements for qualified plan expenses.
- Quickly and easily access funds using the prepaid benefits card at the point of sale, or request to have funds directly deposited to your bank account via online or mobile app.
- Reduce filing hassles and paperwork by using your prepaid benefits card.
- Enjoy secure access to accounts using a convenient Consumer Portal available 24/7/365.
- Manage your FSA “on the go” with an easy-to-use mobile app.
- File claims easily online (when required) and lets the system determine approval based on eligibility and availability of funds.
- Stay up to date on balances and action required with automated email alert and convenient portal and mobile home page messages.
- Get one-click answers to benefits questions. Use it or Roll It Over. And now, up to $500 of your available healthcare Flexible Spending Account balance can be carried over into the next plan year instead.
- FSA dollars can be used during the plan year to pay for qualified expenses and services, and a way to pay for expenses with pre-tax dollars.
With the use-it-or-lose-it rule and benefit limits, many employees (and some employers) wonder if the tax savings provided by a Flexible Spending Account (FSA) and Dependent Care Plan (DCAP) are worth the risks and hassles.
To show how an FSA and DCAP can provide significant tax savings for your employees, let’s consider the example of Joe Workman, an employee of ABC Company. With doctor’s visits, dental exams, and the annual cost of glasses and an eye exam for his son, Joe usually has about $2,600 in expenses that are eligible under an FSA. Joe and his wife, Beth, both work and have work-related child care expenses of $1,500 per month ($18,000 per year). Below are two scenarios, showing Joe’s net pay after these expenses both with and without an FSA and DCAP:
Joe Workman
Without an FSA or DCAP
With an FSA/DCAP
Annual Income $50,000 $50,000
Pre-Tax FSA Election $0 $2,750
Pre-Tax DCAP Election $0 $5,000
Taxable Income $50,000 $42,400
Annual Taxes $7,273 $5,552
After-Tax Income $42,727 $36,848
Out-of-Pocket Medical, Dental, Vision Rx $2,600
Work-Related Childcare $18,000 $13,000
Net Pay After Taxes and Expenses $22,127 $23,848
With an FSA and DCAP for his expected expenses, Joe is “giving himself a raise” of over $1,700 a year!
Joe’s company saves on Social Security, Medicare, and unemployment taxes with Joe’s elections as well:
Joe Workman
Without an FSA or DCAP
With $2,750 FSA/DCAP
Annual Income $50,000 $50,000
Taxable Income $50,000 $42,400
Annual FICA and FUTA $3,867 $3,286
With Joe’s FSA and DCAP alone, his company saves over $500 a year in employment costs!
Handling the Risk of Use It or Lose It
Despite these potential savings, many employees (and employers) still don’t want to deal with the potential risks associated with FSAs. As you probably know, participants have to use their FSA election within the plan year towards eligible expenses; any unused funds forfeited to the plan—this is the infamous use-it-or-lose-it.
Employers have options available that can lessen this risk for employees and make the FSA a more attractive option:
- Grace Period: The grace period provision allows up to 75 days following the end of the plan year, during which participants can use their remaining balance from the ended plan year for new expenses. In an extreme case, this provision would allow a participant who used none of their FSA accounts during the actual plan year to use the entire election on expenses during the grace period.
- $500 Rollover: Since 2014, employers have had the option to add the $500 rollover to their FSA, which allows employees to “roll” up to $500 of an unused FSA balance from one plan year to another. This rolled amount becomes part of the new year balance and is available at any point during the new plan year.
NOTE – the $500 Rollover option is only available to the Health FSA benefit (not DCAP), and a Health FSA can only have the $500 Rollover OR the grace period option, but not both.
- Participant Education: Most employees are highly unaware of all the potential uses an FSA has. Using resources such as a list of ordinary eligible expenses or sites like FSA Store can help educate your participants and ensure they use the maximum amount of their FSA possible.
Why should I invest in an FSA?
Using a Flexible Spending Account (FSA) is a great way to stretch your benefit dollars. You use before-tax dollars in your FSA to reimburse yourself for eligible out-of-pocket medical and dependent care expenses. That means you can enjoy tax savings and increased take-home pay—all with the convenience of a prepaid benefits card. Plus, you can rollover $500 from one year to the next, reducing your risk of losing dollars at the end of the plan year.
Client Review - Sandy Area Chamber of Commerce
“HR Service, Inc. has been a tremendous help to the Sandy Area Chamber of Commerce. They have given us excellent advice that has enabled us to avoid problems with our personnel and to make excellent hires and motivate our employees. With their guidance, our employees are not just putting in a day’s work; they are committed to serving the members. They have a passion and are excited about the Chamber and its mission to help businesses grow and prosper. HR Service has provided far more value than we ever anticipated. A small business needs an HR Service to keep in compliance with the legal requirements. But HR can also help you make great hires, train, and motivate people to excel.”