Flexible Spending Accounts (FSAs) are not a supplemental insurance, but they can be offered alongside your group health plan for an added employee benefit. The FSA account is established by the employer, and employees automatically deposit a portion of their paycheck into the account. The deposits use pre-tax dollars and are deposited in a tax-advantaged account. These amounts are used to pay for any qualified medical expenses that are not covered by health insurance.
FSA accounts can be helpful to both employers and employees. Employers have an additional employee benefit they can use to attract and retain employees, and they can save money on Social Security taxes and payroll taxes. Employees also save on payroll and Social Security taxes, and they can use the FSA deposits to help offset their out-of-pocket medical expenses, including their monthly health insurance premiums. Some FSA accounts even allow payments for the employee’s daily expenses caring for a dependent or for adoption expenses.
With FSA accounts, employees must be careful to use all of the money in the health insurance year. Any money not used cannot be rolled forward to the next year; the money is just forfeited. Employees should carefully budget their expected expenses, such as co-pays for their standard number of doctor visits, co-pays for ongoing prescription drugs, planned expenses such as replacing contact lenses, etc.
There are certain risks associated with offering an FSA. These plans operate like an insurance plan, not a reimbursement account. As the employer, you must make the full coverage amount available at the beginning of the plan year, and you cannot deduct any outstanding amounts owed from an employee’s final paycheck. For example, an employee could spend the full annual election in January and leave your employment in February, long before they have contributed the full contribution. However, the forfeitures from employees who do not use their full benefits usually more than offsetthese costs.
A recent enhancement to FSAs is the implementation of debit cards, making plan administration much more convenient. It offers employees direct access to their pre-tax money, rather than waiting for reimbursement, which can be a big financial benefit, especially for employees who cannot afford to be out-of-pocket for an expensive co-pay. It also reduces the paper work for the employer. With this system, point-of-sale technology allows retailers to identify which products qualify for FSA benefits, so the employee can use the debit card only for approved expenses.