6 FSA Myths

6 FSA Myths

When it comes to your small business, employee benefit programs attract and retain top talent. A recent study from Baylor University found that employees who work at a small businesses have the highest levels of loyalty to their employers. Just because you are small business doesn’t mean you can’t offer a great benefits package. You might be surprised at the variety of options you have at your fingertips. One of my favorite, yet often under-utilized employee benefit is a Flexible Spending Account, better known as an FSA. Below, I’ve debunked a few of the myths about FSAs so you can get the 411.

An FSA is a special account that employees can use to pay for health insurance and related expenses such as co-pays, deductibles, some prescription and nonprescription medications, and other out-of-pocket healthcare costs. One of the biggest benefits for your employees is the ability to put their pre-tax money into their FSA. A Flexible Spending Account puts money back into your employee’s pocket by lowering their taxable income.

There are two different types of Flexible Spending Accounts. The first is the Healthcare FSA, which covers healthcare expenses not covered by insurance. The second, Dependent Care FSA, is for eligible dependents and includes cost coverage of daycare, after school care, and elder care.

One of the reasons Flexible Spending Accounts are a great option for small businesses is because little set up is required for the employer. All FSA requirements and obligations are driven by the IRS making it easy to implement, manage, and maintain.

FSA Employer Obligations Explained

Employers can (but are not required to) make contributions to your employee’s Flexible Spending Accounts. Generally, FSA money must be used within a plan year. Employers can provide one of two options:

  • Offer a grace period of up to 2½ extra months
  • Allow the employee to carry over $500 per year for use in the following year

If you are scratching your head unsure of which to select, there’s no clear practice by employers. In 2014, Healthcare Trends Institute reported that 51% of employers elected to use the grace period option, and 49% elected the 75 day grace period.

Six Flexible Spending Accounts Myths Your Employees May Believe

Covered expenses and pre-tax programs remain relatively the same year after year. Even so, the two FSA plans and the types of healthcare costs that are reimbursed perpetuates are clouded by Flexible Spending Account myths. Be prepared to answer these common questions if you are adding flexible spending accounts to your list of employee benefits or during your healthcare and benefit discussions with new employees. Here are the top six myths of Flexible Spending Accounts:

  1. MYTH – FSAs Will Cost Employees Money. On the contrary, an employee’s flexible spending account is tax free. Yes, employees will select a voluntary amount to contribute to their FSA. Most employees in contribute between $1,000 and $2,000 to their FSA.
  2. MYTH – Employees Can Use FSA to Pay for Healthcare Premiums. Flexible spending accounts are a great way to manage or plan for unexpected healthcare expenses and costs. FSAs cannot be used to pay for health insurance premiums, long-term care costs, or expenses.
  3. MYTH – Medical Marijuana is Approved for Reimbursement Under FSA. Sorry, no. Some states allow the use of marijuana for medical purposes (or have legalized its use in general), but it is still considered an illegal drug at the federal level. Since FSAs are governed by federal law, it cannot be reimbursed under these plans.
  4. MYTH – FSA Expenses Are a Pain to Submit. Do you take credit? If you don’t mind paying with a card, Flexible Spending Account programs are pretty handy because they often offer a debit card program without having to fill out paperwork. Like a standard MasteCard or Visa, FSA debit cards are accepted by most retailers and medical. The FSA debit card program also allows internet shoppers to purchase FSA-approved items online.
  5. MYTH – Employees Have to Pay ‘In’ Before Accessing the Full Amount. The full balance of an employee’s FSA annual contribution is available to them on day 1 of the program. Employees can access the full amount immediately. Employers who offer FSA programs assume the risk if an employee exits the organization prior to paying in the already reimbursed amount. On the employer side, it’s a great employee retention tool.
  6. MYTH – Employees Who Are Terminated Lose All FSA Funds. When employment is terminated, regardless of the circumstances (voluntary or involuntary), the employee can no longer participate in the FSA program. Money can’t be transferred to another employer. Some employers will end plan access immediately upon termination or within the month. Employees can continue their Flexible Spending Account if they elect to continue COBRA.