Let’s explore everything you need to know about a Healthcare FSA and why this benefit makes good sense for employees and human resource managers.
As an HR manager, you are at the forefront of ensuring that your company’s benefits package is competitive, comprehensive, and beneficial to employees. One critical component of this benefits package is the Healthcare Flexible Spending Account (FSA). In this guide, we’ll explore what a Healthcare FSA is, why employees should enroll, how it works, and how to choose the right FSA administrator. We’ll also address common concerns like the “use-it-or-lose-it” rule and provide real-life scenarios that illustrate the value of a healthcare FSA benefit.
Table of Contents
- What is a Healthcare FSA?
- Why Should Employees Enroll in a Healthcare FSA?
- How Does a Healthcare FSA Work?
- Debunking the “Use-It-or-Lose-It” Rule
- Choosing the Right Healthcare FSA Administrator
What is a Healthcare FSA?
A Healthcare FSA is a tax-advantaged financial account established by employers that allows employees to save pre-tax dollars for eligible medical expenses. These expenses include copayments, deductibles, prescription drugs, and other out-of-pocket healthcare costs. By contributing to an FSA, employees can reduce their taxable income, ultimately saving money on healthcare expenses.
Why Should Employees Enroll in a Healthcare FSA?
If your employees spend out-of-pocket for healthcare, enrolling in a Healthcare FSA could save them a significant amount of money annually. Here are some compelling reasons to consider offering an FSA:
Tax Savings
One of the primary benefits of a Healthcare FSA is the tax savings. Contributions to the FSA are made from pre-tax income, which means employees can reduce their taxable income and save on federal, state, and payroll taxes. This can amount to substantial savings over the course of a year.
Federal, state, and FICA taxes lower employees take-home pay by 30% or more, leaving only 70% of their earned income for living expenses. When they use an FSA, they set aside money before it is taxed, so they don’t lose that 30%. FSA users get to spend 100% of the money set aside vs only 70%. Depending on how much is elected to their healthcare FSA, they can save over $900 a year on health expenses (an average 30% of whatever they elect).
Let’s take, for instance, John, who earns $50,000 annually. By contributing $2,000 to his Healthcare FSA, John will save $600 over the year (30% of $2000). He gets to save on taxes while stretching his healthcare budget further!
Immediate Access to Funds
Unlike other savings plans, FSA funds are available immediately and in full at the beginning of the plan year. This allows employees to cover large expenses without waiting for funds to accumulate.
Suppose your doctor prescribes you a medication, but you’re short on funds. If you’ve contributed to your FSA, you can use your FSA debit card to pay for it! This makes it simpler for employees to manage healthcare expenses without worrying about where the funds will come from.
Budgeting for Healthcare Expenses
FSAs encourage employees to plan and budget for their healthcare expenses. By setting aside money each month, employees can better manage their healthcare costs and avoid unexpected financial burdens.
Take Lisa, for example, who found out she needed an expensive surgery. Thanks to her planned contribution to her Healthcare FSA, she was able to afford it without an economic hardship.
Covers everyone in the family
A Healthcare FSA goes beyond covering just yourself – it extends to your spouse and eligible dependents. Let’s consider Sarah, who signed up for a Healthcare FSA. Not only does she benefit from the tax savings, easy access to funds, but her spouse and children do too. This means that your entire family can benefit from the financial advantages of a Healthcare FSA.
How Does a FSA Work?
Contributions
Employees elect to contribute a portion of their salary to the FSA during the open enrollment period. Contributions are deducted from their paycheck in equal installments throughout the year.
Eligible Expenses
There are over 38,000 eligible items that employees can purchase tax-free using their FSA funds, including but not limited to:
- Prescription medications
- Over-the-counter medications (with a prescription)
- Everyday health needs (e.g. bandages, first aid kits, over-the-counter medications, and feminine hygiene products)
- Dental and vision care (e.g., exams, glasses, contact lenses)
Check out the full list of healthcare FSA eligible expenses.
Reimbursement
To access FSA funds, employees can either use an FSA debit card provided by the plan administrator or submit claims for reimbursement. Receipts or other documentation must be provided to verify that the expenses are eligible.
Digital Portals for Account Management
Most FSA administrators offer online portals and mobile apps where employees can manage their accounts, submit claims, and track reimbursements.
Customer Support
Reliable customer support is crucial for helping employees understand their benefits and resolve any issues that may arise. Look for administrators who provide comprehensive customer support through multiple channels, such as phone, email, and chat.
Debunking the “Use-It-or-Lose-It” Rule
The “use-it-or-lose-it” rule is one of the most common concerns about FSAs. This rule means that any unspent funds in the FSA at the end of the plan year are forfeited. However, there are features that can mitigate this concern:
Grace Periods
Some plans offer a grace period of up to 2.5 months after the plan year ends, allowing employees extra time to incur eligible expenses and use their remaining FSA funds.
Carryover Options
Other plans allow employees to carry over a portion of their unused funds (up to $570 in 2024) into the next plan year, providing additional flexibility.
Choosing the Right FSA Administrator
Selecting the right FSA administrator is crucial for ensuring that the plan runs smoothly and provides maximum benefit to employees. Here are some important factors to consider:
Evaluate Experience and Reputation
Look for administrators with a proven track record and positive reviews from other organizations. Experienced administrators are more likely to provide reliable service and support.
Assess Technology and Tools
Ensure that the administrator offers user-friendly digital tools, such as online portals and mobile apps, that make it easy for employees to manage their accounts and submit claims.
Consider Customer Support
Strong customer support is essential for addressing employee questions and resolving issues quickly. Look for administrators who offer support through multiple channels and have a reputation for responsiveness.
Compliance and Security
Ensure that the FSA administrator complies with all relevant regulations and has strong security measures in place to protect sensitive information.
Review Fees and Costs
Compare the fees and costs associated with different administrators. While cost shouldn’t be the only factor, it’s important to understand how much the FSA program will cost your organization.
For more guidance, download our guide on how to evaluate and choose the right healthcare FSA administrator. Also consider our cheat sheet on good questions to ask when evaluating an FSA admin.
Healthcare FSAs are a valuable benefit that can help employees save on healthcare costs, manage their expenses, and improve their overall financial well-being. As an HR manager, understanding the ins and outs of FSAs, addressing common concerns, and choosing the right administrator are crucial steps in maximizing the benefits of this program for your organization.
By implementing a well-managed FSA program, you can enhance your benefits package, support your employees’ financial health, and contribute to a positive workplace culture.
Optimize your benefits strategy and start reaping the rewards of a Healthcare FSA today!
