FSAs: Enjoy the Benefits and Avoid the HR Headaches by Using a PEO

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FSAs-let-us-help-navigateHow PEOs Simplify The Benefits Process

Since most cafeteria plans renew at the beginning of each year, this means it’s time to enroll in Flexible Spending Accounts, or FSAs.  FSAs are tax savings vehicles that allow employees to contribute part of their salary to the sponsoring employer’s Section 125 Cafeteria Plan on a pre-tax basis in exchange for certain benefits provided by the Plan.

There are five types of FSAs recognized by the IRS as eligible to be included in an employer’s cafeteria plan and receive preferential tax treatment. At its most basic, an FSA is a way for employees to pay for certain expenses with pre-tax dollars, which increases take-home pay; at its most complex, an FSA isn’t even an “account” at all. The expenses for which an employee may use the funds in an FSA depend on the type of FSA to which the employee is contributing. The five types are:

  • General Purpose Healthcare Flexible Spending Account
  • Limited Purpose Healthcare Flexible Spending Account
  • Dependent Care Flexible Spending Account
  • Parking Account
  • Transit Account

Healthcare FSAs

As its name suggests, a Healthcare FSA is used to pay for eligible healthcare expenses incurred during the plan year. If the FSA is “general purpose,” this means the funds an employee contributes to the account can be used for medical expenses like deductibles, copays, coinsurance, and medically necessary supplies and equipment and most dental and vision expenses, as well. If the FSA is “Limited Purpose,” the list of eligible expenses for which the funds may be used is limited to dental and vision expenses and only those medical expenses incurred after the participant’s health plan deductible has been met.

Dependent Care Accounts

This type of account is used to pay for eligible daycare expenses for the employee’s dependent children and step-children and eligible eldercare expenses for the employee’s dependent parents, step-parents, or parents-in-law.

Parking and Transit Accounts

As the name implies, a Parking Account is used to pay for certain expenses an employee incurs to park at work or a place from which the employee commutes to work.  The funds an employee contributes to a Transit Account can be used to pay for certain expenses the employee incurs for using mass-transit to commute to and from work.

Benefits and Risks of FSAs

Flexible Spending Accounts offer tremendous benefits to employees who choose to use them because every dollar contributed to an FSA is a dollar that never gets taxed. Even more appealing is that the full amount they elect to contribute to a general purpose or limited purpose healthcare FSA is available to them on Day One, giving the employees full access to however much they’ve pledged to contribute to the plan on January 1st, even though they have not yet made any contributions.

Enrolling in an FSA is not without risk. The IRS sets a maximum amount that may be contributed to each of these accounts in a 12-month period or “plan year” and, for the most part, requires unused funds at the end of the plan year to be forfeited. New regulations, though, permit employers to adopt plans that allow employees to carry some of their unused balance into the next plan year. An election to contribute to a Flexible Spending Account is generally irrevocable during the plan year, and it is important for anyone considering making a contribution to an FSA to know the terms of the plan and estimate their expenses as accurately as possible before committing to a contribution amount.

PEOs Make it Simple

Employers who are thinking of adding an FSA to their benefits package should consider partnering with a Professional Employer Organization (PEO) as there are many, many ways doing this on your own could go wrong. Sponsoring an FSA opens the employer up to considerable financial exposure due to the pre-funding requirement and adds a tremendous administrative burden because, aside from the normal day-to-day administration inherent with sponsoring any benefit plan, Section 125 plans are subject to non-discrimination testing to ensure that the plan isn’t being used as a tax avoidance vehicle for the company’s key and highly compensated employees.

Additionally, consider the amount of time it would take to verify that every expense an employee submits for reimbursement is eligible under the Code. Unless you are intimately familiar with Section 125 of the Internal Revenue Code and the lengthy list of eligible expenses for each type of FSA you want to offer, you will need to outsource this function to a third party vendor. Penalties for non-compliance are astonishing and could lead to outright disqualification of your entire Section 125 plan, resulting in serious financial consequences to your employees in the form of taxes and to your company, in the form of taxes and penalties.

By partnering with a PEO, you gain access to not only a wealth of knowledge and experts to help keep you compliant but also to the PEO’s master plan, which in most cases means all you have to do is let your employees sign up – the PEO handles the rest.

Contact the author directly at james.herrin@staffone.com. This is the fifteenth post in our 30 Days of HR Outsourcing series. Visit us each day in November for information on HR, payroll, benefits, workers’ comp and risk management topics, or subscribe to be notified instantly when a new post is published.

Photo copyright: Blazej Lyjak