Flexible Spending Accounts: What All Employers Should Know

Flexible Spending Account Document on a Table

Are your employees looking to lower their taxes and reduce their out-of-pocket expenses on healthcare? Then you might want to consider looking into providing an FSA or flexible spending account for them. Here’s what you need to know.

Flexible Spending Accounts Come in Two Types

You could set up healthcare FSAs that your employees could tap into for covering healthcare expenses not covered by their health plans or insurance. Or, you could likewise set up dependent care FSAs that your staff could use for paying for long-term care or childcare costs.

There are Requirements for Dollar Limits

You could set up FSAs as salary deductions from your employees. However, tax statutes limit the amount that your staff contribute to their FSAs every year.

Mid-Year Changes on Restrictions

In general, employees should commit to contributions from their salaries right from the start of each year. But particular events, like the ones below, allow employees to modify their contributions:

  • A child’s death, adoption, or birth
  • A spouse’s death, marriage, legal separation or divorce
  • An employee, dependent, or spouse’s change of residence
  • An employee, spouse, or dependent’s employment status, such as becoming unemployed or starting work, returning from an unpaid leave, or a lockout or strike
  • Getting a decree or judgment ordering an individual to provide support for a child’s healthcare expenses
  • Becoming eligible for Medicaid or Medicare

Taxes for Payroll

Your employees’ contributions to their FSAs not only lower their salaries subject to income tax but lower their wages for reasons such as employment taxes as well. Take note however that state and federal income tax laws significantly differ.

Employer Cost

Because your employees fund their FSAs, your only responsibility is to set it up and administer it. You could do this yourself or with outside help if you have 10 or more employees. Otherwise, you’d have to handle all FSA administration tasks including evaluating claims as well as distributing funds.

Flexible spending accounts or FSAs are an appealing benefit that your employees would greatly appreciate. You could offer your employees a sustainable way to pay for their personal expenses. Consult an FSA administration professional to help you set up FSAs for your hardworking employees.