FSA EMPLOYER FREQUENTLY ASKED QUESTIONS
Employers
Section 125 of the Internal Revenue Service Code permits employees to pay for certain expenses via payroll deductions before Federal, State and Social Security/Medicare taxes are applied. This is done through an employer sponsored plan.
Section 125 plans typically have three plan components:
As an added bonus, employers also save the matching Social Security/ Medicare taxes. Employees may save as much as 40% on eligible expenses depending on their tax bracket and an employer saves 7.65% of that which is often enough to offset the costs associated with administering the plan.
Section 125 plans typically have three plan components:
- Premium Conversion Plan (POP) This portion of the plan allows employees to pay for their group insurance premiums (medical, dental and vision) with pre-tax income.
- Flexible Spending Account (FSA) An FSA is used to pay for healthcare related out-of-pocket expenses such as co-pays, deductibles, prescriptions, dental work, glasses, etc.
- Dependent Care Spending Accounts (DCA) This type of account is used to pay for dependent (usually child) care expenses incurred while employees (or their spouses) are at work.
As an added bonus, employers also save the matching Social Security/ Medicare taxes. Employees may save as much as 40% on eligible expenses depending on their tax bracket and an employer saves 7.65% of that which is often enough to offset the costs associated with administering the plan.
Any employee who meets the eligibility requirements of the Section 125 plan set forth by
the employer may choose to participate.
On an annual basis (usually during Open Enrollment) the eligible employee must determine
if they wish to participate in the FSA and/or DCA plans.
At this time, the employee must first estimate how much money they believe they will
spend on eligible expenses for healthcare and/or dependent care and then how much of
their income they wish to contribute (pre-tax) to these accounts.
The annual amounts indicated on their election form are then divided among the total
number of payrolls the employer has each year.
"Pre-funding" means that the full annual amount an employee elects for the plan year is
available for reimbursement on the first day of the plan year
(or the first day an employee becomes a participant in the plan).
This is only true for Flexible Spending Accounts (healthcare expenses).
In other words, an employee who elects to defer $1,200 into his FSA for the plan year ($50 for each 24 pay periods) can submit an eligible expense incurred in the first month of the plan year. The expense will be reimbursed up to the annual election less any previously paid claims, regardless of how much the participant has contributed to date.
"Pre-funding" can also be viewed as a tax free loan from the plan to the employee, with all future employee contributions repaying the plan.
"Pre-funding" can also be viewed as a tax free loan from the plan to the employee, with all future employee contributions repaying the plan.
No. Dependent Care reimbursements are not subject to the "pre-funding" requirement. Reimbursements are made based on the participant's account balance at the time the claim is submitted. As an example, an employee with a $200 available DCA balance submits a $500 childcare claim. The amount reimbursed will only be $200 (the available balance) and the difference ($300) is held until future plan contributions are posted to the account.
There are two ways employees can access their funds for reimbursement.
- Planned Benefit Systems, Inc. provides each plan participant with a PBS Benefits Card that can be used to pay their portion of medical, dental and vision expenses which are deducted directly from their FSA account.
- Alternatively, the participant can use their own funds to pay the expense, complete a claim form attaching the receipt and submit it to Planned Benefit Systems, Inc. for reimbursement with pre-tax contributions from their FSA account.
There are numerous controls built into the PBS Benefits card. It will only work for certain merchant codes that are related to health care. Approval parameters are set by the system based upon an employer's medical, dental, vision and prescription plans. If any card swipe does not meet the criteria, a request will be made for the participant to provide documentation of the expense in question. If they cannot provide this, they will be required to repay the amount back to the plan. If they do not repay the plan, the card will be deactivated until payment is received. Ineligible transactions left unresolved may result in additional tax consequences for the employee.
90% of plan participants use their benefits card for eligible expenses and less than 1% of all plan contributions have to be repaid (ineligible expenses paid via the benefits card).
90% of plan participants use their benefits card for eligible expenses and less than 1% of all plan contributions have to be repaid (ineligible expenses paid via the benefits card).
Possibly depending on several factors. Participants will only be able to access as many dollars as they have
available in their account at the time of the transaction. A transaction for $.01 more than the available balance
will be denied. Also, many Day Care providers do not accept credit card payments and some employers have requested
this payment option not be available to their participants. However, if an employer has not imposed this restriction,
the funds are available and the merchant will accept the benefits card, the transaction will be processed. We suggest
participants check their DCA balance prior to using the card to pay for Dependent Care expenses.
No. The IRS does not allow employers to deduct any balance owed the plan from a final paycheck. Only the standard, scheduled contribution can be deducted.
While employers face the risk of reimbursing more than what has been contributed, each plan participant also faces a "use it or lose it" provision. Employees that don't spend all of their contributions during the plan year forfeit the balance to the plan.
The employer establishes the maximum amount an employee may contribute to the FSA and DCA accounts. The IRS however, has established an annual limit for the Dependent Care plan, which is currently $5,000. The IRS does not have a pre-determined FSA limit for healthcare expenses so each employer's plan may have different FSA plan maximums. Planned Benefit Systems, Inc. can assist employers with establishing an appropriate plan maximum so that employees benefit while plan liability is controlled.
The plan must be in writing, outline who is eligible, indicate the plan maximums (and minimums if any) and outline eligible expenses (and any exclusions) along with a number of other IRS governed components. Planned Benefit Systems, Inc. can prepare an employer's document based on their needs. In addition, annual discrimination tests must be done to ensure the plan does not discriminate in favor of owners, officers and highly compensated employees. We also provide testing as part of our complete administrative services.
Absolutley, our experience shows a solid correlation between employee education and plan
participation. To aid in this process, we have created a short (10 minute)
FSA Informational Video
designed to quickly convey the tax savings benefits and the "how-to's" of participation. This video is available free of charge to all our clients.
Planned Benefits Systems, Inc. also provides updated enrollment forms, Q&A sheets, eligible expenses listings, etc. for your use at Open Enrollment. If needed these documents are also available in Spanish at no additional cost.
Planned Benefits Systems, Inc. also provides updated enrollment forms, Q&A sheets, eligible expenses listings, etc. for your use at Open Enrollment. If needed these documents are also available in Spanish at no additional cost.
That's great. Planned Benefit Systems is here to guide you through the process.
Click here to
Request a Quote
and we will contact you to schedule a time to discuss your needs and answer any remaining questions you may have regarding a Section 125 plan. You and your employees will be glad you did.
