Flexible Spending Account
A Healthcare Flexible Spending Account (HC-FSA) is an employer-sponsored account letting employees set aside pre-tax dollars to pay for eligible healthcare expenses. It’s a smart way to save and pay for eligible healthcare expenses, because employees don’t have to pay federal or FICA taxes on the money they put into their account, and many state taxes are also exempt. With an HC-FSA, pre-tax funds are deducted from each paycheck and automatically deposited into the employee’s account.
When an employer augments a benefits package with an FSA, it sends a strong message to employees that their employer cares about their health and well-being, and helps employers attract and retain staff. Benefits for employers and employees include:
Control - Employees decide how much to contribute and control how best to spend their healthcare dollars.
Tax savings - Pre-tax contributions lower taxable income for employees.
Flexibility - Employees can plan ahead for out-of-pocket expenses they know they'll have, such as orthodontia or other major dental work, eyeglasses, and prescriptions.
Productivity - Healthy and happy employees are more engaged in their work and are better for the employer’s bottom line.
Plan Design Options for an HC-FSA
There are no health plan deductible or out-of-pocket requirements for an HC-FSA, which can be offered with any health plan. Employees select the amount of their contribution up to the IRS limit. In 2020, the maximum election allowed is $2,750. Employers determine whether employees can roll over unused funds up to $550 per year.
Employers can offer a Limited Purpose FSA (LP-FSA) for reimbursement of dental and/or vision expenses. The LP-FSA is most common when paired with a Health Savings Account (HSA) and is a great option for employees with children needing glasses or orthodontia.
How it Works
With an FSA, employees save money by reducing their taxable income and budgeting for healthcare costs. The first step for an employee is to estimate their annual HC-FSA contributions carefully and make their election in open enrollment. Regular pre-tax contributions to the FSA come from their paycheck.
In this example, to show tax savings from the FSA, the employee elected to have $100 withheld from his or her paycheck every pay period and deposited into an FSA.
|Federal income tax – 25%||$25.00|
|State income tax – 5%||$5.00|
|FICA – 7.65%||$7.65|
|Tax Savings every paycheck||$37.65|
|Tax saving annually (24 pay periods)||$903.60|
Employees have access to the total election amount of their HC-FSA on the first day of the plan year, even though they have not made all of their payroll contributions yet. As an employer-sponsored benefit, the employer funds the reimbursement of expenses and recoups those funds throughout the plan year.
When employees incur IRS-qualified medical expenses, they can submit claims to be reimbursed from the FSA. All claims have to be substantiated or verified as an eligible expense. Submitting claims can be done online, on our mobile app, or by mail. Having a debit card with the FSA provides easy access to FSA dollars, especially at pharmacies and doctors’ offices.
Why We Ask for Substantiation
The Internal Revenue Service (IRS) requires plan administrators to validate that an FSA is used only for eligible healthcare expenses. When an employee submits a claim for reimbursement to their FSA, they’ll need a detailed receipt from their pharmacy, doctor, or other healthcare provider, or an Explanation of Benefits (EOB) from their health plan. These must include:
The date of service or purchase;
The name of the provider, such as a doctor’s office or pharmacy;
The service or item purchased; and
The amount the employee paid or is responsible for paying.
If a receipt doesn’t include all of the necessary information, we have to deny the claim. We’ll notify the employee by letter (or by email, if they choose) and tell them how to resubmit the claim with the proper documentation.
Debit Cards and Receipts
Most of the time, when employees use their debit card, the purchase is automatically substantiated. This means that the provider’s merchant system sends us the information we need to verify the card was used for an eligible expense. There are times, though, when we can’t verify that the card was used for an eligible expense. When that happens, we’ll send the employee a notice asking for a receipt or other documentation and instructions on how to send it back to us.
As a service to employers, HSA Bank offers the faciliation of ERISA Plan Documentation as well as Non-Discrimination Testing for Flexible Spending Accounts.
ERISA Plan Documentation
HSA Bank can facilitate the generation and maintenance of the written Plan Document and Summary Plan Description for FSA plans. The Employee Retirement Income Security Act (ERISA) requires employers who offer welfare benefit plans to create these documents and provide them to employees. These documents are a crucial part of any benefit program offered by employer groups as they communicate the plan benefits and how each plan operates. All documents are stored electronically for later reference and include a date and time stamp of the original or any subsequent revisions.
HSA Bank can facilitate the Non-Discrimination Testing (NDT) for FSA plans. The IRS requires employers to perform NDT each year. The reason for NDT is to prevent key and highly compensated employees from receiving a disproportionate amount of employer provided tax-free benefits as compared to the rank-and-file employees. NDT is an important component of plan compliance. Failure of an employer to satisfy the nondiscrimination testing requirements or take the necessary corrective measures can result in the inclusion of the discriminatory benefits in the income of highly compensated employees.