FLEX Spending Accounts
What is a FLEX Spending Account?
Flexible Spending Arrangements, also known as FSAs, FBAs (Flexible Benefit Accounts), or simply FLEX, are one of the most dramatic developments in employee benefit plan design. They are also referred to as Cafeteria Compensation Plans. It is a plan whereby an employer may provide employees the opportunity to elect benefits on a Pre-Tax basis.
Employees decide on the amount of money to be budgeted for each benefit option pre-selected by the employer. Employees then utilize this account throughout the year as needed, to cover a variety of eligible expenses not covered by health plans, such as:
- Cosmetic/LASIK procedures
- Group life and health premiums
- Medical expenses
- Dependent care assistance
With FLEX, most of these expenses can be paid with pre-tax dollars, yielding substantial income and FICA tax savings for many employees. That means increased spendable income, a nice compliment to the increased freedom to choose benefits.
What Are the Advantages For an Employer?
Without the investment of new funds, an employer is able to serve a number of objectives, including:
- Reduce FICA tax contributions
- Improve employee morale due to pre-tax financing of expenses and expanded benefit choices
- Increase employee health care cost awareness
- Enhance recruiting by offering progressive benefits
What Are the Employee Tax Advantages?
In the absence of FLEX, employees must pay out-of-pocket portions of employer-sponsored health, life, long-term disability, and accidental death and dismemberment plan premiums, as well as health expenses not covered by the employer’s health benefit plan, with after-tax dollars. Dependent care expenses are paid on the same basis.
With FLEX, most of these expenses can be paid with pre-tax dollars, yielding substantial income and FICA tax savings for many employees. That means increased spendable income, a nice compliment to the increased freedom to choose benefits.
Who Qualifies?
Every business and its non-owner employees qualify. Governmental and most private, not-for-profit organizations can also have a FLEX plan. All employees, other than sole proprietors, and most partners in partnerships may participate.
FLEX: How Spending Accounts Work
Each year during an open enrollment period, employees are given the opportunity to participate in a variety of voluntary benefit programs including, when available, a Flexible Spending Account (FSA) Program. As an employee, when you decide to participate in your employer’s FSA program there will be several things you will need to do:
1. Complete an election form identifying the amount of pre-tax salary to have set aside each pay period.
2. Submit a signed/completed form to authorize your employer to make your requested pre-tax deduction. These payroll deductions are placed in your spending account each pay period during the plan year.
3. When an expense is incurred, the employee must submit a claim form to their Spending Account Administrator requesting reimbursement of the expense from the spending account. The claim form must be accompanied by documentation (i.e., receipts or Explanation of Benefit notices) that identifies the provider name, the dates of service, a description of the service and/or name of the medication and the total amount of the claim. Claims may be submitted any time during the plan year.
4. Following receipt of a claim for reimbursement, the Spending Account Administrator will provide a check to the employee in the amount of the claim, using the tax free money in the spending account. Employers can stipulate a minimum reimbursement amount, and the Spending Account Administrator will not issue a check until the minimum has been reached.
FLEX: Frequently Asked Questions
What Are the Advantages of Offering a Flexible Benefit Plan?
- Benefit budgeting capabilities
- No mandatory purchases or changes in insurance plans
- Immediate tax advantages
- Greater employee perception and appreciation of benefit package, etc.
What Can We Expect to Save With This Plan?
On average, the employer and employee savings will be approximately 30% of the employee portion of their benefits. Reimbursement of non-insured medical, dental, and day care expenses would be additional savings.
What Items are Available to Employees on a Pre-Tax Basis?
Items generally available (allowed by the Company) through the program fall into one of the following categories:
- Premiums for items such as medical, dental, group term life or accident & sickness insurance
- Cancer & intensive care, disability income insurance and other insurance premiums
- Uninsured or non-covered medical and dental expenses
- Dependent Care Expenses
What Are the Advantages for Employees?
The advantages are varied, but the most common are the employee savings on federal income taxes (15-28%), FICA (7.65%) and state income taxes on their contributions.
What is the Advantage to the Company
Since employee contributions are shifted to non-taxable income, the employer savings is created because the company computes FICA, FUTA and sometimes Workman’s Compensation on a lower taxable payroll. Because of this reduction, the company saves approximately 8% to 10% on each dollar directed through the plan. In addition, if an employer wishes to maintain future contributions for employees, availability of optional benefits can be offered to employees at no additional company expense.
How Much Can an Employer Contribute to Their FSA?
The IRS will allow up to $5000 in pre-tax FSA deductions per year. However, this amount will vary by employer group.
