Toward the end of 2015, the IRS reminded eligible employees and employers to start planning for their Flexible Spending Arrangements (FSAs) for 2016. Now that 2016 has arrived, we want to remind employers and employees about how FSAs work.
An FSA is an employee benefit offered by some employers that allows employees to put aside pre-tax dollars from their paychecks in order to pay for eligible health care expenses. FSAs are usually funded through a voluntary salary reduction which employees agree to because FSA funds are tax-free.
Employees can contribute up to $2,550 during the 2016 tax year to any FSA. Employees can use FSA funds to pay for eligible medical expenses not covered by their health plans, such as co-pays, deductibles and a range of other medical products and services. Depending on the plan, employers can also contribute to employees’ FSAs.
If an employee puts the maximum of $2,550 into his FSA in 2016, but only ends up spending $2,050, there are two options he might have, depending on his FSA plan: 1) The unused $500 can “roll over” to 2017, or 2) there is a grace period up to 2.5 months to use that $500. ($500 is the maximum amount that can be used in both cases, not more.) Some plans don’t offer either option, in which case the employee should make sure to use all of his FSA funds during the year, or whatever remains.
If you are an employer that offers FSAs or you are thinking about offering FSAs, here are some current guidelines to keep in mind:
- The IRS created new guidelines regarding participation in FSAs for same-sex spouses. Companies should make sure their HR departments have this updated information.
- Employees who contribute to general purpose health FSAs are not allowed to contribute to an HSA, (Health Savings Account) at the same time.
- Employers have flexibility in choosing which FSA to offer their employees (and we can help you choose the one that benefits your company the most).
- FSAs should be offered as part of a cafeteria plan in order for the employer to reduce the amount it pays towards FICA, Federal Unemployment Tax Act, Workers’ Compensation and some state taxes.
Employees and employers should keep in mind that FSAs cannot be used to pay for health insurance premiums, long-term care coverage, or charges that are covered under another health plan. Additionally, in order to receive an FSA distribution, employees must provide a written statement from an independent party stating the medical expense and its amount.
Questions About FSAs?
If your company offers FSAs, but you would like your HR department to review the current laws and guidelines, Corporate Financial can assist you. Alternatively, if your company does not offer FSAs and you would like to consider doing so, call us today and we will guide you through choosing the plan that best suits your company.