Currently Integrity Communications does not offer
flexible spending accounts for their employees. Management is now considering
this option in addition to their benefits package; however they are not
familiar with the plans as well as the risks and benefits associated with them.
A flexible spending account allows employees to set
a portion of their paycheck aside, tax free, to take care of expenses not
covered by your health insurance. These expenses include copays, prescriptions,
dental, and vision expenses. This allows employees to pay for expenses
throughout the course of the year.
does an FSA work
An FSA operates under what is called a cafeteria
plan. This plan is essentially a reimbursement plan that the IRS governs
allowing employees to contribute a portion of their income to an account before
taxes are collected. Once a year during what employers call an open enrollment
period employees are given the option to join an FSA. If an employee elects to
participate in the plan the employee will have decisions to make. These
decisions include what are the expected expenses for the year, does my employer
contribute to the plan, and what is the total amount that will be needed in the
account to cover upcoming expenses.
The contributions to this plan are deducted from an employee’s
paycheck throughout the year. There is a cap on how much an employee can
contribute in a year and that cap is set at $2600. So if an employee wanted to
contribute $2600 a year to the plan payroll deductions for 26 pay periods would
be $100 dollars a paycheck. Two options exist for the use of this plan by
employees. The first option is to pay for the expenses out-of-pocket and then
present a receipt for reimbursement, or most plans offer a debit card
eliminating the need for reimbursement.
FSAs can be beneficial to the employee in many ways.
One of the biggest benefits to the employee is immediate availability. FSAs are
fully funded by the employer at the beginning of the year. This means that the
employee has full access to the funds from the beginning of the year. Another
benefit to an FSA is the employee will experience tax savings. When an employee
contributes to the plan it is done on a pretax basis meaning that the employee’s
taxable income is less, which means they will owe less to the IRS. With this
comes another benefit to an employee which is an increase in take home pay.
This essentially is based on the fact that the medical expenses they would pay
out of pocket reduce their income on their check because they are using after
tax money instead of pretax money. In a world of increasing healthcare costs
some of these increases are being passed to the employee. FSAs help the
employee offset these costs. FSAs help with small medical expenses such as
copays, prescriptions, and other small fees that would normally come out of the
While there are several benefits to FSAs there are definitely
risks that the employees need to be aware of. The biggest risks is the use it
or lose it, employees need to be aware that unused funds at the years end are
forfeited except for $500 which can be carried into the next year. Employees
will need to adjust contributions in that year to accommodate the money left
over from the previous year. Another risk is the cap that is put on
contributions in the year which can be offset if a spouse contributes the max
amount as well. With this plan the employee’s contributions are not returned to
them in the event they are terminated from employment or leave. FSAs have a
narrow window for employees to sign up if they miss this window then they will
not be able to take advantage of this plan in the next year, unless there is a
condition such as a birth or marriage these events allow for enrollment outside
of the enrollment period. Once an employee has signed up and contributions have
been set there is no changing the contribution unless they experience an event
like marriage or adoption. FSA contribution cannot be used as a tax write off.
Just like the employees employers receive benefits
from offering these plans. Just as employees see a tax break so do employers.
When talking about eh tax break an example would be an employee making $60,000
a year with a taxable income of $57,400, because of his contribution of $2600
to his FSA. This reduces the amount of taxes he pays to Social Security and
Medicare. This reduction is also passed onto the employer as the employer doesn’t
have to pay these taxes on his $2600 contribution. Employers however can use
the offering of an FSA as an employee recruiting and retention tool. Employees
that are well taken care of and are saving money while affording to take care
of medical expenses are generally happier and more productive employees, which
helps the employer.
Employers offering FSAs to their employees face some
risks associated with this offering. The plan does not manage itself so someone
has to keep the plan running and handle and reimbursements this management
comes at a cost though. Another risk to employers is the need for reimbursement
of a major cost early in the year. For example an employee has a major cost of
$1200 at the first of the year and wants to be reimbursed for their out of
pocket expense. As the holder of the plan the employer must always make sure
that the account is funded to handle such an event. The biggest risk with this
is the face that the employer is counting on the employee staying with the
company long enough to reimburse through payroll deductions the amount paid to
FSA plans allow employees to set aside a portion of
their income pretax for expenses that their healthcare plans do not cover. This
is a benefit to the employee in more ways than one. Employees can expect
reduced taxes and an increase in their pay due to the reduced taxes. Employees
however need to be sure that what they select as their yearly contribution
meets their need. Employees need to make sure to sign up during the enrollment
period to take advantage of it during the year. Employees are eligible to
contribute up to $2600 in a year and carry over $500 into the following year.
This plan can be used for their spouse and any children under the age of 26.
Employers also see benefits of this plan as they also receive the tax break.
Employers fully fund the plan at the beginning of the year and are reimbursed
by payroll deductions of the employees. Employers risk the loss of their fund
if an employee leaves before fully reimbursing their part of the plan. FSAs are
a huge benefit to both employee and employer and should be a part of Integrity
Communications benefit package.