Flexible Spending Accounts
Flexible spending accounts allow employees to pool pre-tax earnings for medical and child care expenses.
Are you looking for opportunities to strengthen your employee benefits package? If so, you may want to look into adding a flexible spending account, or FSA, that allows employees to set a portion of their pretax earnings aside to pay for medical expenses and/or dependent care. Nixon & Lindstrom Insurance has helped businesses throughout Springfield and southwest Missouri partner with insurance companies to offer FSAs to their employees. Request a quote today to start the FSA selection process.
The IRS created flexible spending accounts (sometimes called flexible spending arrangements) in the 1970s after inflation and other economic factors led to more expensive health benefits, prompting employers to dial back employee coverage in certain areas. Here’s how they work. Flexible spending accounts enable employees to pool pre-tax earnings—up to a specified limit—for medical and child care expenses.
Money deposited into FSAs can be used for a variety of qualified expenses. While details differ, most healthcare FSAs cover health care, medical equipment purchases and prescription medications, as well as insurance deductibles and copays for employer-sponsored health, vision and dental plans. Employees facing ongoing expenses in these areas are great candidates for FSAs health plans. Similarly, employees paying for child care each month could benefit from diverting a portion of their paycheck to a dependent care FSA.
Each year, employees enrolled in FSAs decide how much money to put aside but cannot exceed the annual contribution limit set by the IRS for individual employees. The total amount an employee chooses to contribute each year is divided by the number of annual paychecks and deducted equally over time.
While FSAs are generally considered an attractive money-stretching tool, there is a downside. The bulk of FSA funds must be used in the calendar year they were deposited, although the IRS allows employers to include a carryover provision or grace period for added flexibility.
FSAs have been a steady part of employee benefits in the private sector for many years. In 2019, about 40% of private industry workers had access to healthcare or dependent care FSAs, according to the U.S. Bureau of Labor Statistics. That’s up about 5% since 2010, so FSAs are gradually becoming more popular.
On a broader scale, studies have shown there’s some confusion about exactly how FSAs work, but millions of employees have discovered their value and are wisely using them to pay for routine expenses with pretax earnings. FSAs have become more convenient over the years, and the majority now provide enrollees with a special debit card for covered expenses. FSAs are fully funded at the beginning of the plan year, which can be helpful for employees who encounter larger-than-expected medical expenses.
Employees aren’t the only ones who stand to financially benefit from FSAs. By offering this benefit, large and small businesses avoid payroll taxes on the contributions employees make to their FSAs. If your business has a large number of employees who are regular FSA contributors, that adds up.
If your company is looking to stand out in a competitive industry, an employee benefits package that includes an FSA could make you more attractive to potential candidates. Don’t overlook these affordable add-ons when assembling your benefit offerings.
If your business is ready to start offering flexible spending accounts to employees, contact Nixon & Lindstrom to start comparing quotes from leading benefits providers. Whether you’re a small or large business, our experienced agents can help you keep FSA costs low and maximize convenience for employees who decide to take advantage of these tax-savings tools.