If your Maine-based small business doesn’t provide health insurance, or if you do provide coverage but your employees are faced with increasing deductibles, co-pays or out-of-pocket expenses, it’s the perfect time to take a look at flexible spending accounts (FSAs).
A form of cafeteria plan under Section 125 of the Internal Revenue Code, a health care FSA allows employees to set aside pre-tax dollars from their paychecks to pay medical and dental expenses that are not reimbursed from an insurance plan. Eligible expenses are then reimbursed from the employee’s account. You can also offer flexible spending accounts for dependent care expenses.
Flexible spending accounts offer several advantages to your company and your employees. There are, however, some disadvantages to be aware of. One of the best known is the “use it or lose it” feature. Any amounts contributed to an account and not spent by the end of the year are forfeited to the employer. There have been some recent changes to the rule, allowing the employee another two and a half months to spend their contributions from the previous year.
Filler & Associates has come up with some more pros and cons of FSAs for your small business and its employees:
From the business owner’s perspective:
- Decreased taxable salary income for employees, because of contributions to reimbursement accounts, means less employer expenses for FICA tax, unemployment insurance, workers’ compensation and other wage-based expenses.
- Usually most of the cost for administration is offset by the FICA tax savings.
- The biggest con of an FSA for employers is the “at risk” provision associated with health care reimbursement accounts. This provision requires that you reimburse an employee for incurred eligible expenses up to the full amount that he or she has elected to set aside for the entire plan year, regardless of how much he or she has actually contributed up to that point. This means that you could be reimbursing your employees for expenses when they have not yet made the contributions to the account.
From the employee’s perspective:
- Reduced taxable salary income means employees reduce their federal income tax, FICA tax and frequently, state income tax. Because an FSA reduces adjusted gross income, it may make an employee eligible for other valuable tax benefits.
- Employees can be reimbursed with pre-tax dollars for out-of-pocket deductibles, co-pays and procedures that are not covered by their health care insurance (if they have coverage).
- For many employees, FSAs are the only way to get a tax break for medical expenses. That’s because medical expenses are generally only deductible to the extent they exceed 10 percent of adjusted gross income in 2014.
- Covering medical expenses with pre-tax dollars via FSAs provides employees with more spendable income.
- Employees are concerned about the “use or lose it” provision of health care accounts. If an employee elects to contribute $2,400 for the plan year, but incurs only $2,000 of eligible expenses, the remaining $400 reverts to the employer.
Keep in mind that if you decide to implement an FSA plan, employee education is a critical component for maximum participation. If you are interested in learning more about FSA plans, talk with Filler & Associates. We can help you examine all the pros and cons and determine if an FSA is right for your small business.