Editor’s note: Tips from the Pros is a reader service of Worcester Sun. The opinions and views expressed, and the advice offered, are solely those of the author.
Recently we [Advantage Benefits Group, where Vanessa is co-founder and principal] have been recommending that all our clients seriously consider installing a flexible spending account (FSA).
For those who aren’t sure, a flexible spending account is an option offered in many employee benefits packages to which the employee can contribute pre-tax dollars for out-of-pocket spending on medical, dental and vision costs. Sometimes employers match these contributions, like in a 401(k).
These programs have been around for quite some time, but typically have only been popular with larger companies. Smaller businesses tend to see reservations from both employer and employee perspectives.
Traditionally, employees have been afraid of the “Use it or Lose it” issue — participants choose an annual contribution, but barring a grace period and qualifying events may not be eligible or able to spend all of it — with these plans. The IRS, however, now allows a rollover provision wherein employees can carry up to $500 in your FSA from one year to the next.
Another historical hurdle has been understanding what items or services could be purchased from the account.
Now there are resources like The FSA Store, a marketplace for all things eligible to be purchased with your FSA debit card. Between the rollover provision and The FSA Store, it has become difficult for employees now to lose money that they contribute to their FSA.
Employers, on the other hand — particularly those with smaller businesses — have been hesitant considering the amount of risk they are exposed to as well.
For example, if an employee elects to withhold $2,000 from their annual salary, that money must be available to them from day one. So, if an employee incurs an eligible expense on Jan. 10, has the full $2,000 paid from the plan, and then terminates, say, on Feb 1, the employer never has a chance to recoup that money and ends up funding most of the expense.
Then again, most of our clients have a very steady workforce, so how much risk is there that this may happen?
Over the past five years, it seems to me the need for an FSA plan has actually increased dramatically as employers have moved to high-deductible health insurance plans exposing employees to large amounts in non-tax deductible, unreimbursed medical expenses (deductibles and copayments).
A company-sponsored FSA will in essence turn these non-tax deductible expenses into tax-deductible expenses, thus lowering the effective cost by 30 percent between federal, state and FICA taxes.
At the same time the rates to administer FSA plans have dropped considerably. Here are the costs for the complete administration for 12 months and include the debit cards:
- 1-9 employees = $750
- 10-19 = $1,050
- 20-49 = $1,350
- 50-99 = $1,750
- 100+ = negotiated
Note: There is an additional charge the first year of $300 for the plan documentation
Don’t forget there is savings for the employer also: All contributions to an FSA lower the FICA taxes similar to your Section 125. If you had three employees only contributing $20 per week or $9,360 over 12 months, it would save the employer $716 for the year.
In closing, as employee unreimbursed medical expenses have increased, rules regarding employee contributions to an FSA have been relaxed and the costs to administer and FSA plan have dropped.
It makes a lot of sense for even small employers to implement an FSA plan.
Vanessa Costa is partner and cofounder of Advantage Benefits Group, an employee benefit management agency in downtown Worcester. The Assumption College graduate can be reached at Vanessa@advantagebenefits.com.