A Practical Guide to FSA

Flexible Spending Accounts are one of the best employee benefits offered by employers of all sizes. This is true because there are benefits for both employees and employers.

Flex Plans are cost efficient!
A Flex Plan is a voluntary benefit that is funded by employee contributions, although an employer may contribute to a Flex Plan as well. In addition to benefiting employees, Flex Plans also offer a payroll tax savings to the employer.

Employers are not required to match Social Security, Medicare, or pay Workers Compensation premiums (in Ohio) on contributions employees make to their Flex Plan Accounts. The payroll tax savings on employee contributions minimizes Plan operational costs.

Flex Plans help overcome the shrinking benefit syndrome!
Of the options available to employers to contain rising benefits costs, there are two which are viable. These are to regularly increase deductibles and co-pays, and/or require that employees pay more of the total premium. Employees view these two choices as very negative. Employees have been conditioned to believe that medical insurance should pay for everything and that employers should continually absorb premium increases. Reductions are not well received.

Flex Plans are a positive response to inevitable benefit changes!
Employers have found that a tax free Flex Plan can be a positive addition to their benefit programs. Byoffering a Flex Plan, the employer is giving each employee a tax free bank account to help soften the impact of increased employee benefit costs.

What are Flex Plans?
Flex Plans expand the scope of employee benefits without increasing employer costs. A pre-tax Flex Plan is a non-discriminatory employee benefit program designed to take advantage of certain provisions of Section 125 of the Internal Revenue Code. The plan helps your employees purchase certain items on a tax free basis. Examples of such items are medical deductibles & co-insurance, prescription and doctor expenses, dental expenses including charges for orthodontia, vision expenses, and work-related child care to name but a few.

How do Flex Plans work?
This is truly an employee benefit because only employees of a sponsoring employer may open such a tax free account. Each employee is given the opportunity to establish his or her own Flex Account. At the beginning of each plan year, each employee decides how much his or her qualifying expenses will be in the coming year. Based on this budgeting process, contributions are then made through payroll deductions into their Flex Account. These deposits are made on a tax free basis. As expenses are incurred, the employee may request reimbursements from the account, which are also tax free.

What Are The Advantages?

The Three Advantages To The Employer:

  1. Employers do not have to match Social Security, Medicare, or pay Workers Compensation payroll taxes (in Ohio) on voluntary contributions to a Flexible Spending Account.
  2. Flex Plans are easy to implement, are easy to maintain and are cost efficient. This is in direct contrast to other employee benefits which cost you time, money, and have little employee appreciation.
  3. Flex Plans help temper negative reactions to benefit changes either in the form of increased premium contributions and/or benefit reductions.

Because of the payroll tax savings, an employer may actually make money by merely offering the plan to employees.

There Are Two Advantages To The Employee:

  1. The first advantage is that contributions to a Flex Account are not taxable for Federal, most State, Local (in Ohio), Social Security or Medicare. To pay eligible expenses, a participant need only earn $1.00 to pay $1.00.
  2. The second advantage is that participants get to make annual contributions to their Account equally over each pay period. Payroll deduction makes budgeting for these types of expenses a lot easier.

You’ll be amazed! Employees will be very vocal about their appreciation for extending this benefit to them.

What Will Encourage Employees To Contribute?
The administrator you choose must have several capabilities to achieve maximum employee contributions. Ask questions when evaluating what an administrator will do to encourage employees to contribute.

6 questions to ask any administrator . . . . . . . . . .

      • Ask to look at employee communication pieces.
      • Ask to see their educational presentation.
      • Ask how often claims are paid.
      • Ask if walk-in claims payment is offered.
      • Ask if claims are reviewed upon receipt.
      • Ask for a list of services to be performed.

Understanding and using a Flex Account is not obvious. Educational meetings are critical. Someone must teach employees how to use a Flex Account or, as is the case nationally, employees won’t use it. Review carefully the administrator’s ability to teach.

More than anything else, this one question will determine in advance your employee’s eagerness to participate. The more often claims are paid the better. Claims paid once a month will produce the lowest level of participation. Claims paid daily will produce the highest level of participation.

Few administrators permit participants to bring claims to the administrator’s office and wait while their reimbursement is processed on the spot. There are lots of participants who will appreciate and use this service.

A certain percentage of submitted claims are incomplete. Waiting until claims payment time to review claims will substantially increase the time between submission of the claim and receipt of a reimbursement if the claim must be sent back for more information.

Some administrators are full service. Some are not.