If your organization doesn’t already offer healthcare flexible spending accounts, year-end is the perfect time to start. And if your organization does offer employees this valuable benefit, now is the time to re-educate them.
Flexible spending accounts or arrangements (FSAs) are accounts offered and administered by employers that allow employees to set aside, out of their paycheck, pretax dollars to pay for qualified medical expenses. These can include insurance premiums, vision or dental care, or any other medical expenses not covered by the employer’s health plan. These accounts are allowed under Section 125 of the Internal Revenue Code and are also referred to as “cafeteria plans” or “125 plans.”
Typically, employees must use FSA funds within the given benefit year or lose the money. Flexible spending accounts can also be provided to cover childcare expenses, but those accounts must be established separately from medical FSAs.
Employers may contribute to these accounts as well as employees. Currently, healthcare FSAs have no statutory contribution limit, although some employers limit contributions, usually somewhere between $2,000 and $3,000. Beginning on January 1, 2013, however, contributions will be capped at $2,500 per year.
- Reducing their taxable income can save your employees an average of 30 percent on eligible medical expenses paid out of the FSA. And your organization can save approximately 7 to 10 percent for every dollar your employees place in an FSA on reduced employer state and FICA taxes. For many employers, these savings exceed the costs of administering employees’ FSAs.
- Despite these advantages, the National Compensation Survey by the Bureau of Labor Statistics found only 17 percent of all workers had access to an FSA. And of the employees with access, only 20 percent participate, according to a recent study by Harris Interactive for Aflac.
- To get the most out of this low-cost benefit, you will need to invest time and energy in educating your employees. Some pointers:
- Educate your employees on the tax advantages of FSAs. Nearly everyone has out-of-pocket healthcare expenses. If you allow employees to deposit a maximum of $2,500 in an FSA, the tax savings translate into an average savings of approximately $750.
Encourage employees to make a deferral decision. Automatic re-enrollment makes sense for a lot of benefits, but with an FSA, the default election is zero. If your employees do not make a deferral election by the deadline, they will forfeit this benefit for an entire year.
- Remind employees that FSAs are a “use it or lose it” proposition. Participants lose any funds remaining after the spending deadline, so encourage them to elect their deferral carefully. Under previous law, participants had to spend their FSA funds by the end of the company’s benefit year, usually December 31. Any leftover account amounts were forfeited. In 2005, however, the Internal Revenue Service added a grace period, allowing plans to let participants to use their contributions to pay for healthcare expenses incurred as late as two and a half months after the end of the plan year. Employers do not have to allow a grace period, however.
- Send employees a reminder before year-end that they need to use their FSA balances. Provide a list of eligible expenses as a prompt. Suggestions for using FSA funds include scheduling routine preventive care appointments, such as vision and dental exams, stocking up on prescription drugs, getting flu and other vaccines, starting a smoking cessation program, and applying for reimbursement for mileage to eligible medical, dental and vision appointments.
- The IRS allowed 19 cents per mile driven for medical purposes from January 1 to June 30, 2011. From July 1 to December 31, mileage rates will be 23.5 cents per mile, due to higher gasoline costs.
- Remind employees that the Patient Protection Act changed the rules on using funds from an FSA or health reimbursement arrangement to pay for over-the-counter drugs. Employees can no longer use pre-tax dollars to pay for over-the-counter drugs, unless they have a doctor’s prescription for them.
Consider offering an FSA debit card. Without a debit card, employees must pay their healthcare expense out of pocket, fill out a form and wait for reimbursement. With a debit card linked to their flexible spending account, they can access funds immediately. Most vendors limit FSA debit card use to certified healthcare providers, such as pharmacies, clinics, etc. Even with a debit card, employees must keep their receipts to document that their expenses are FSA-eligible.
For information on FSAs, FSA debit cards and other administrative services that can simplify your benefits administration, please contact us.
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