FSA FAQs: What should employers know about Flexible Spending Accounts?

FSA FAQs: What should employers know about Flexible Spending Accounts?When it comes to employee benefits, it’s always best to stay up-to-date on the latest trends regarding products and solutions. But with so many options, regulations and administrative tasks, it can be difficult to become an expert in all of them.

Thankfully, Clarity is here to help simplify the employee benefits process one step at a time!

Let’s start by addressing some frequently asked questions (FAQs) about one of our most popular solutions: Flexible Spending Accounts (FSAs). Use this quick list of FSA FAQs to help you assist your employees as they navigate their benefits! 

FAQs

  • What is an FSA?

A Flexible Spending Account (FSA) is a benefit a company sponsors for their employees. This pre-tax account helps make health care more affordable by allowing employees to decide the annual amount to contribute based on the amount they expect to spend for health care expenses not reimbursed by insurance.

  • What’s the difference between a Healthcare FSA and Dependent Care FSA (DCA)?

With a healthcare FSA, your employees can pay for eligible healthcare expenses on a pre-tax basis, which reduces the amount paid for federal income tax, FICA tax and, as applicable, their state income taxes. Healthcare FSAs cover an extensive list of eligible, reimbursable expenses, as defined by IRS Code Section 213(d).

While a dependent care FSA gives your employees the ability to pay for work-related dependent care expenses with pretax dollars, which allows them to save on federal income tax, FICA tax and, as applicable, their state income taxes. DCAs may provide your employees more tax advantages than the federal income tax credit.

  • How does an FSA provide tax benefits for the employer and employee?

With a Clarity FSA, contributions are pre-tax for employees and their employers. Employers save 7.65% on every dollar contributed due to Social Security savings and employees save between 20 and 40% on their elections! For instance, if Jane earns $2,000 each month and participates in Clarity FSA and Dependent Care, she is able to take home an extra $100 each month! 

  • What are the contribution limits for an FSA?

For 2023 the Maximum Health FSA Salary Reductions limit is $2,850 with a Maximum Carryover to Next Plan Year of $570.

  • Are there any regulations that employers should be aware of?

Healthcare FSAs are governed by Internal Revenue Code Section 125 when offered through a cafeteria plan. If the healthcare FSA isn’t offered through a cafeteria plan, it’s subject to Internal Revenue Code Section 105. Also, most FSAs are usually subject to ERISA, COBRA and HIPAA laws. It’s best to have knowledge of these regulations and to stay up-to-date on any changes.

  • How do employers stay compliant?

FSA plans cannot discriminate in favor of highly compensated or key employees. To ensure that employers are in compliance with the requirements set by the Internal Revenue Service (IRS) Section 125 Cafeteria, nondiscrimination testing is required annually.

  • How does the FSA store work?

Employees can easily make purchases with their Clarity debit card at the FSA store. The FSA store offers a range of over 4,000 products eligible for reimbursement. Items purchased through the FSA Store are auto-substantiated and comply with even the most recent healthcare reform provisions. Our FSA store makes it fun and easy for consumers to use their FSA and save even more money!

  • Who is eligible for an FSA account?

Any employee of an employer who offers an FSA should be eligible to open an FSA. Then, any dependents of that employee can benefit from that employee’s FSA funds.

One exception applies to owners or partners of select business types. According to IRS guidelines, anyone with two percent or more ownership in a schedule S corporation, LLC, LLP, PC, sole proprietorship, or partnership may not participate. However, C-corporation owners and their families are eligible to participate in FSA plans because they are considered to be W-2 common law employees.

  • What can FSA funds be used toward?

FSA funds can be used in many different ways. Some common eligible purchases include in-store purchases at doctors’ offices or qualified retailers for everything from co-pays and eye exams to prescriptions and over-the-counter medical supplies.

Some surprising FSA-eligible purchases include Lasik, dental care and orthodontia, X-rays and X-ray fees, breast pumps and accessories, feminine hygiene products, as well as acne, eczema and psoriasis treatments. Explore the FSA Store’s Complete FSA Eligibility List.

  • What happens if all the funds are not used by the end of the year?

FSAs are traditionally “use it or lose it” type of accounts meaning leftover funds will not roll over into the next year. However, employers can either use the leftover funds to apply to administrative costs incurred during the plan year or give it back to employees by crediting it to employees’ FSAs in the next plan year at a current Maximum Carryover of $570 for 2023. The latter option can occur only if the funds are allocated on a uniform and reasonable basis to all of the FSA plan participants. Additionally, the employer is not taxed on the unused funds that are forfeited from an employee’s FSA.

  • What’s the difference between grace period, rollover and run-out?

The grace period refers to a period of 2.5 months following the plan year in which employees can still utilize their unused FSA funds allocated for that initial year. The period helps address the “use-it-or-lose-it” nature of FSAs by allowing employees more time and flexibility to use their funds.

Rollover, or carryover, is an optional feature that allows employers to choose whether or not an employee can carry over a pre-determined amount of unused FSA funds to be used at any point in the next plan year. For 2023, the FSA rollover limit is $570.

Run-out is a period of time at the end of a plan year that gives employees time to collect and submit documentation and receipts for reimbursement toward any medical expense that occurred within the plan year. This is typically 30, 60, or 90 days and is not required but often included in most FSAs.

The Clarity Commitment

At Clarity Benefit Solutions, we are committed to fostering positive relationships with our clients that produce meaningful and impactful outcomes. From administration and regulation to product offerings and customer service, we strive to be there to answer any question you may have–not just those that may be frequently asked 😉.

Contact us to see how a Flexible Spending Account can make a difference to your organization and the lives of your employees!