David Rodeck

Are Flexible Spending Accounts Right for Your Employees?

Even if your employees have health insurance, they’re still paying out-of-pocket for all kinds of medical expenses. According to the Kaiser Family Foundation, the average deductible on health insurance plans is $1,478. There are also other costs such as the dentist, medical supplies and glasses. Flexible spending accounts (FSAs) can help your employees pay for everything.

How Do FSAs Work?

In an FSA, employees contribute money from their paycheck into their accounts. The contributions are pre-tax so employees get a tax deduction while saving money for medical expenses. As of 2017, the maximum employees can save per year in an FSA is $2,600, according to the Society for Human Resource Management.

When employees have out-of-pocket medical expenses, they can pay using their FSA funds. Most plans provide a debit card so employees can spend directly from their accounts.

They can use an FSA to pay for deductibles, co-payments, prescription and over-the-counter drugs, vision care, dental care, chiropractor bills and medical supplies such as bandages and cough syrup. However, employees can’t use the FSA to pay for their insurance premiums.

What Are the Benefits of FSAs?

With the FSA tax deduction, employees get a nice discount on their health care spending. Let’s say an employee is in a 30 percent tax bracket with federal and state taxes and they have $2,000 a year in out-of-pocket medical expenses. If they use the FSA, they spend $2,000 of pre-tax income. To pay for everything with after-tax salary, it would cost $2,850 in pre-tax earnings ($2,850 x 70 percent = $2,000 after-tax).

As the employer, you also save money because you don’t pay taxes associated with the Federal Insurance Contributions Act (FICA) on whatever the employee adds into their FSA. That’s 7.5 percent saved on whatever your employees contribute.

Are FSAs Right for Your Organization?

Flexible spending accounts are a low-cost workplace benefit. If even a few of your employee seem interested, it’s probably worth setting up. Through annual and monthly fees for FSAs, you stand to earn more money with every employee who signs up. With just a couple employees using the FSA, you’d make the money back in FICA tax savings.

What Are the Trouble Areas?

Before employees start putting money in an FSA, warn them that it’s a “use it or lose it” system. They’re supposed to spend all the money in their account by the end of the year. You can set up your plan to transfer up to $500 to the next year but if employees have more than that leftover, they forfeit the remaining money to you.

If employees have money left over near the end of the year, they should plan some last-minute shopping like buying glasses or stocking up on medical supplies.

With the help of FSAs, your employees will get a little more bang for their buck on health care spending.

David Rodeck is a professional freelance writer based out of Delaware. Before writing full-time, he worked as a health- and life-insurance agent. He specializes in making insurance, investing and financial planning understandable.