Flexible Spending Accounts FAQ
Q. What are the advantages of having an FSA?
A. FSAs allow employees to make pre-tax salary contributions to pay for qualified medical and dependent care expenses. By reducing taxable income, FSAs actually increase disposable income. The funds put into an FSA are not subject to Federal income and FICA taxes, nor most state and local income taxes. The bottom line is employees save 20% to 40% on every dollar elected and employers save about 8%.
Q. Who can sponsor a flex plan?
A. Regular corporations, partnerships, S corporations, limited liability companies (LLCs), sole proprietors, professional corporations, and not-for-profits can all save money on taxes by establishing a flex plan. While regulations prohibit a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the flex plan, they may still sponsor a plan and benefit from the savings on payroll taxes. "Employee" share-holders of regular corporations may also participate.
Q. Must money be deposited in the employee's account before expenses are paid or a claim is filed?
A. No. The entire annual amount elected for the Health Flexible Spending Account (FSA) is available on the first day and throughout the plan year. However, only amounts contributed to date are available for Dependent Care, Parking, Transit and Adoption expenses.
Q. If an employee sets aside part of his/her pay, won't they make less money?
A. No. For every dollar set aside to pay for qualified expenses, social security tax (FICA), federal income tax, and (where applicable) state withholding taxes are saved. Their net take-home pay will increase by the tax saved. Plus, when an employee pays a qualified expense or receives a cash reimbursement, it's tax free.
Q. If an employee gets his/her health insurance through their spouse or somewhere else, can they still save?
A. Yes! The employee and his/her family can still set aside money (before taxes are taken out) to budget and pay for qualified expenses. Remember, a qualified expense paid from this plan cannot be eligible for reimbursement from another plan.
Q. Can employees start, stop or change their annual election amount any time during the year?
A. No, they may only change their FSA election for the Plan Year if they have a 'qualifying status change' - birth, death, adoption, or change in marital status - and notify the HR department of this change in status within 30 days of that change. The HR Department or the Benefits Summary will identify the Plan's status changes. Otherwise, the election lasts one Plan Year, and can only be changed on the first day of each Plan Year. Also, the employees must re-enroll each year to take advantage of this benefit.
Q. How do employees get their money out of the account after incurring qualified expenses?
A. They submit a claim form, including receipts, via mail or fax to prove that they have incurred an eligible expense. Once the claim has been reviewed, reimbursement will be made via direct deposit to their personal checking account or by check mailed to their home.
Q. What happens to any unused money in the accounts at the end of the plan year?
A. Employees must "use it or lose it." The unused amount is forfeited back to the employer at the end of the plan year. Employees must be careful when choosing an election amount at the beginning of the plan year so as not to be left with money in their account.
Q. What supporting documentation do employees need to submit with a claim form?
A. For Health Care Expenses, employees must complete the claim form and submit either an explanation of benefits statement (EOB) or detailed receipts, containing the type of service or product provided (the name of the prescription is not required, as long as the receipt indicates that the product was a prescription drug), date the expense was incurred; the employee's, spouse's or dependent's name for whom the service/product was provided, unless it is an over-the-counter medication; person or organization providing the service, unless it is an over-the-counter medication; and the amount of the expense.
For Dependent Care Expenses, a copy of the bill or signed receipt must be attached to the claim form, or have the provider sign the claim form. Requests cannot be processed without the Tax ID or SSN for all providers. This number must be provided each time a claim is submitted.
Q. What happens to the accounts if an employee terminates employment?
A. Employees may request reimbursement for qualified expenses incurred prior to termination. The Summary Plan Description will explain additional rights provided by the plan.
Q. Are there any negatives that the employees should know about?
A. Because they will not pay social security tax on the amount of gross pay set aside to pay for qualified expenses, their social security benefits at retirement may be slightly reduced. However, most tax advisors recommend taking advantage of current tax-savings opportunities like take care.
Q. Who can I or my employees contact for questions on the FSA?
A. Call MHM Services at 800-876-7548 or visit their website at www.125plan.com.