Flexible spending accounts (FSAs) are an excellent tool for promoting employee wellness and attracting and retaining top talent. Providing your workforce with the option to set aside part of their pretax income for medical and dependent care expenses benefits everyone. However, this strategy can backfire if not carefully thought through.
This FSA implementation guide for employers will help to maximize the advantages of these accounts and minimize risks.
TABLE OF CONTENTS
Steps and process of offering an FSA for employees
First, here’s how to set up an FSA for small and large businesses:
1. Determine if an FSA makes sense for your organization
To see how FSAs fit into the big picture, evaluate your company’s existing employee benefits package, as well as any ongoing or planned corporate wellness program. FSAs are employer-sponsored accounts, which come with administrative, financial, and compliance challenges, so adopt them only when necessary.
FSAs are perfect for plugging gaps in employer-sponsored health plans, encouraging higher worker participation, and in turn, helping keep premiums affordable. The funds contributed to these accounts can cover out-of-pocket healthcare expenses, such as deductibles and copayments, as well as the cost of medical equipment and prescription medication.
Gather feedback from staff to learn about their pressing and unmet needs, which should give you a better idea of whether they can truly benefit from FSAs. Setting up FSAs can be burdensome and risky for small businesses, so only pull the trigger when you’re positive that it won’t result in redundant benefits.
2. Choose an FSA administrator
Work with a seasoned administrator to reduce the administrative burden of offering FSAs to employees and ensure compliance with all legal steps. This third party helps you navigate the complicated IRS guidelines, avoid HIPAA violations, and handle claims.
Hiring a third-party administrator to guide HR professionals in implementing FSAs is optional for employers. However, to forgo its services is to take the self-administration route, which means the HR department must manage payroll deductions, claims approvals, and reimbursement timelines, all on their own. FSA administration is a high-risk function, as one error could result in costly and reputation-damaging noncompliance.
According to The Difference Card, many employers choose a third-party administrator to handle the more complex areas and take advantage of FSA’s tax benefits. After all, FSA plans must comply with IRS regulations, which can be complicated as they change frequently, so it's essential to stay abreast of regulations to ensure your plan remains compliant.” Staying current with the ever-changing regulatory environment requires a considerable amount of resources, and it would be wise to collaborate with experts to cover all the bases.
3. Disclose the benefits to employees
Introduce the benefits to the team. Explain what FSAs are, how they work, and what makes them different from the other employer-sponsored health benefits your organization is offering. Who’s eligible, what expenses FSAs cover, and how to set them up are key points your organization should touch on.
Consider sharing the details via email, which could also be an effective way to remind participants to use their benefit before the year ends. You can incorporate visuals to get the message across more clearly. Encourage everyone to reply and ask questions about the benefit.
Schedule a town hall meeting or a video conference call with all stakeholders to address the most common concerns. Allow time for a Q&A session to hear more comments and answer new questions.
4. Set up your FSA plan
Get the ball rolling once the whole team is on the same page. Your FSA administrator will help set up and execute your plan, keeping IRS regulations in mind to ensure compliance at every turn.
It's also recommended to set up a main document that can serve as the employer's guide for FSA implementation. Prepare it, provide enrollment materials for interested parties, and arrange payment deductions for FSA contributions.
5. Receive training on FSA administration
Train the entire HR department on all things FSA, since HR will be the primary point of contact for employees regarding this benefit, so your organization’s human resources representatives should be familiar with its ins and outs. An HR team capable of answering situational questions can prevent employee confusion and frustration, which can increase participation and minimize disputes.
FSA administrators provide HR professionals with adequate education and can support every step of the process. For example, providers may have a member portal or a mobile app packed with essential resources to assist. The company assigns a dedicated account manager to every client and provides a customer service line answered by representatives based in the United States, with an average response time of under 30 seconds.
6. Evaluate your plan annually
Review your FSA plan to ensure it continues to promote participants’ financial wellness. Regularly monitor your FSA plan to ensure it works as intended and meets your employees' needs. Then evaluate your plan annually to determine if any changes are necessary based on employee feedback or changes in IRS regulations.
Only FSA plans that adapt to the times can effectively meet the needs of employees without jeopardizing the organization’s cash flow. Outdated ones can diminish this benefit’s utility and expose the company to potential compliance risks.
Types of FSAs and eligibility
FSAs apply only to full-time and part-time employees as well as new hires. By definition, third-party service providers, such as consultants and freelancers who only function as independent contractors, are self-employed and therefore ineligible for this benefit.
The most common FSA types that small and large businesses set up for employees are as follows:
- Healthcare FSA: Healthcare FSA funds cover eligible out-of-pocket medical care expenses. It often includes medical, vision, and dental costs, as well as deductibles and co-pays.
- Dependent care FSA: Dependent care FSA contributions offset expenses such as childcare, after-school care, summer day camps, and eldercare.
- Limited-purpose FSA: Limited-purpose FSAs only pay for eligible vision and dental costs and complement high-deductible health plans and health savings accounts.
Employee enrollment process: Key considerations
Interested parties may only opt for this benefit during the organization’s chosen open enrollment period. New hires are an exception to the rule though, as they may enjoy the coverage immediately and enroll by their start date.
Non-participants may join, while participants may change elections mid-plan-year due to qualifying life events, such as marriage, birth or adoption of a child, and divorce.
Taking steps to offer FSAs to employees requires careful thought and planning to avoid unexpected and unwanted consequences for the organization. Consider these factors to anticipate challenges and minimize the management’s blind spots:
Overall employee benefit package
FSA integration into compensation packages isn’t always seamless. This benefit may be incompatible with others, so understanding its eligibility rules and limitations matters.
Third-party administration
Outsourcing FSA administration is optional, but the fee you pay for a third party that lives and breathes it is worth the expense to avoid potentially significant losses due to liability and compliance issues.
Employer contributions
FSA funds can come exclusively from employees. However, strategic employer contributions can increase participation and boost talent retention. Healthcare-related benefits are an effective way to show appreciation and make workers feel that they’re valued members of the organization.
Uniform coverage
Participants are entitled to their full elected annual amounts from day one. Employees could max them out before contributing a single dime and leave the company, leaving employers with no recourse to recoup the funds.
Funds forfeiture
Employers keep unused FSA funds and may use them on permissible expenses, such as administrative costs. However, your organization may give participants a grace period of up to two and a half additional months to maximize the benefit or decide to carry over up to $660 per year in the following year. Only one of the two options is allowable, but either policy will be a better option to employees instead of losing their unspent contributions outright.
Promote employee wellness with FSAs
Reducing employees' taxable earnings, increasing their budgets for medical expenses, and incentivizing them to spend the funds sooner rather than later can create a healthier and happier workforce. With this FSA implementation guide, you can maximize the benefit’s advantages and manage risks.