What is the benefit of a Flexible Spending Account? (For employers)

In 2024, companies need competitive benefits to attract and retain top talent without significantly increasing overhead costs. 

Unfortunately, this is sometimes difficult to offer for these reasons:

• Comprehensive healthcare coverage is costly.
• Retirement benefits require significant contributions and administrative costs
• Education assistance benefits are costly and may not be used by all employees

So, what do you do as an employer? 

Employers can get creative with employee spending accounts. These flexible benefits put employees in the driving seat with their benefits. However, this is just one of the many benefits of Flexible Spending Accounts (FSAs). 

In this, we’ll explore the other benefits Flexible Spending Accounts (FSAs) can have on a business. Let’s get into it.

Key Takeaways

• Unspent FSA funds are subject to a use-it-or-lose-it rule.
• FSAs facilitate compliance with healthcare laws.
• FSAs allow customization to meet diverse employee needs.
• Higher utilization rates are typical for FSAs compared to traditional benefits.
• Employers need to assess workforce needs and overall strategy when implementing FSAs.
• FSAs can aid in financial planning for healthcare expenses.
• They also help retain and attract top talent.
• FSAs are unique for every organization; know what works for you.

What is an FSA?

A Flexible Spending Account (FSA) is a tax-advantaged spending account that allows you to allocate pre-tax dollars for eligible health-related expenses, effectively reducing your taxable income.

The main advantage of an FSA is the tax benefit: the funds you contribute are exempt from income tax and payroll taxes, offering substantial savings.

FSAs are offered as part of a benefits package and are regulated by the IRS. 

It comes in two forms:

1. Healthcare FSA - this covers a wide range of medical, dental, and vision expenses not covered by insurance, such as copayments, deductibles, prescription medications, and over-the-counter items.
2. Dependent Care FSA - this covers qualified dependent care expenses, such as daycare, preschool, and after-school programs.

The use-it-or-lose-it rule 

When offering an FSA, you need to understand and communicate the specifics of this rule to employees. 

Under the use-it-or-lose-it rule, funds not used within the designated plan year are forfeited. 

Employees should carefully estimate their eligible expenses and contribute accordingly to avoid losing funds. 

However, there are exceptions to this rule, such as a grace period or a rollover option, which can help employees utilize any remaining funds. 

To mitigate this concern, many employers also offer a run-out period, which allows employees to submit claims for eligible expenses incurred during the plan year, even if the deadline to use their funds has passed.

Benefits of a Flexible Spending Account

There are many benefits to offering Flexible Spending Accounts (FSAs) as part of your employee benefits packages. 

Here are a few reasons why FSAs are so popular among employers and employees.

1. Customizable benefit

One of the biggest advantages of FSAs for employers is the ability to customize plans to meet the diverse needs of their employees. 

Employees have different needs, and traditional benefits may not cater to everyone. 

If the workplace is predominantly younger, how do you justify large contributions to a retirement plan over education benefits?

If older workers are predominant, how do you justify contributing primarily to childcare expenses?

FSAs offer the flexibility to adjust contributions and expenses based on your workforce's specific demographics or needs. 

This not only helps attract top talent but also shows that the employer cares about the individual needs of employees.

2. Higher utilization rates

One significant challenge with traditional benefits is that they often go underutilized. 

For instance, many employees may not fully utilize paid time off or education assistance benefits, wasting resources. On the other hand, FSAs typically have higher utilization rates at 52%

Employees are incentivized to use the funds they have contributed, and with healthcare expenses constantly increasing, there is a greater need for financial assistance in this area.

Plus, with the use-it-or-lose-it rule, employees may feel motivated to use their funds before they are forfeited, resulting in increased utilization.

3. Reduced tax liability

As mentioned earlier, FSAs offer significant tax savings for both employers and employees. 

Employers can deduct employer contributions from their taxable income, while employees can contribute pre-tax dollars, reducing their income.

This results in savings for both parties and makes the benefits package more attractive, thus assisting in recruiting and retaining top talent.

4. Financial planning for healthcare expenses

Healthcare expenses can be unpredictable and costly. 

FSAs allow employees to contribute pre-tax dollars throughout the year for eligible expenses, providing a cushion for unexpected healthcare costs.

This can reduce financial stress and help employees plan for healthcare expenses better, leading to greater peace of mind and job satisfaction.

5. Attract and retain top talent

In today's competitive job market, offering a comprehensive and attractive benefits package is crucial for attracting and retaining top talent.

FSAs add value to the overall benefits package, making a job offer more appealing to potential employees.

Additionally, the flexibility and customization options of FSAs can show that the employer cares about the well-being and needs of their employees, leading to improved job satisfaction and retention rates.

6. Cost savings

FSAs can also offer cost savings for employers. 

For example, employers can save on payroll taxes by allowing employees to cover eligible expenses with pre-tax dollars. 

Additionally, offering an FSA as part of the benefits package can help reduce employee turnover, which can be costly for employers.

However, assessing your specific workforce needs and overall strategy is important to determine if an FSA is a cost-effective option for your organization.

7. Ease of implementation and administration

FSAs are relatively easy to implement and manage compared to traditional benefits. 

A typical FSA only requires a plan document and a third-party administrator (TPA) to handle claims processing. 

This reduces administrative burden and costs for employers, allowing them to focus on other important aspects of their business.

If you're interested in simplifying your employee benefits, <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts.

Is a Flexible Spending Account worth it?

Flexible Spending Account (FSA) can be highly beneficial, but here are a few factors to consider if it’s suitable for your organization:

1. Workforce needs and preferences

Assess the needs and preferences of your employees. FSAs are generally popular among employees as they provide tax savings and flexibility for healthcare expenses.

If your workforce comprises individuals with significant out-of-pocket medical, dental, or vision expenses, offering an FSA can be highly beneficial and well-received.

2. Cost savings for employers

Evaluate the potential cost savings associated with offering an FSA. As an employer, you can save on payroll taxes such as Social Security and Medicare for the amount employees contribute to their FSAs.

These savings can offset the administrative costs of implementing and managing the plan.

3. Employer contribution options

Consider whether you want to contribute to your employees' FSAs.

While employer contributions are not required, contributing to your employees' FSAs can enhance the attractiveness and value of the benefit. 

Employer contributions can be a powerful incentive for employees to participate in the FSA program.

4. Administrative effort

Evaluate the administrative effort required to manage an FSA. Implementing an FSA requires compliance with IRS regulations, record-keeping, and coordination with third-party administrators or financial institutions.

Assess whether your company has the necessary infrastructure or if you prefer to outsource administrative tasks to an experienced benefits administrator.

5. Employee education and communication

Consider the effort required to educate and communicate the benefits of an FSA to your employees. FSA plans can be complex, and effective communication is crucial to ensure employees understand the advantages, eligible expenses, and how to maximize their tax savings.

You should invest time and resources in educating employees about the FSA program to encourage participation.

6. Compliance with healthcare laws

As an employer, you are responsible for adhering to healthcare laws such as the Affordable Care Act (ACA) and the Health Insurance Portability and Accountability Act (HIPAA).

Some of these requirements may apply when offering an FSA. 

For instance, under the ACA, FSAs should be designed to qualify as “excepted benefits.” 

Also, various requirements under HIPAA, such as privacy and security of employee health information, apply to FSAs.

7. Overall Benefits Strategy

Evaluate how the FSA fits into your broader benefits strategy. Consider other benefits you offer and how an FSA can complement or enhance your existing offerings. Offering FSAs or Health Savings Accounts (HSAs) as options can work well with healthcare plans.

Weigh these factors against your organization's goals, budget, and employee needs before deciding if offering an FSA is worthwhile for your company. Consulting with a benefits specialist or financial advisor can provide additional insights tailored to your circumstances.

How to get started with Forma

At Forma, we've helped hundreds of businesses, such as Lululemon, Stripe, and UKG, and we have gained valuable insights into why employers continue to opt for FSAs. 

However, it is important to remember that every organization is unique, and what works for one may not work for another. 

As a result, it's essential to carefully evaluate your workforce's needs and preferences, your organization's budget, and your ability to manage an FSA effectively.

Through our employee benefits platform, we help employers:

• Understand the ins and outs of FSAs
• Evaluate your employees' needs and preferences
• Determine your budget and contribution
• Choose the right FSA program
• Educate your employees
• Implement the FSA
• Manage the FSA regularly

Ready to get started? <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts and see how Forma can work for your business.

^{This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor is it intended to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.}