A Flexible Spending Account (FSA) is one of the many important features of an employee benefits package. But with so many benefit options to choose from, its hard to know which is the best option. Below BASE® has answered a few common questions about the FSA to help an employee make the best decision during their Open Enrollment period.
The BASE® Flexible Spending Account (FSA) is a pre-tax benefit plan that allows employees with more options to pay for out-of-pocket medical expenses not covered by the health insurance plan. Employees can use their FSA dollars on qualifying out-of-pocket medical expenses such as copays, prescription drugs, over the counter (OTC) medications, and more.
BASE® is here to answer some of the most frequently asked questions about FSAs. 4 are listed below:
- How much should an employee contribute? To figure out how much an employee should contribute for the plan year, they should take into account what they spent in the past year on any eligible medical expenses. After knowing that number, they need to determine if it will align with what they expect their eligible medical expenses will be for the coming year. One thing to remember, the IRS sets contribution limits for the FSA, so it is important to stay below the limit. For 2020, the FSA contribution limit is $2,750.
- Carryover or grace period? The IRS has the “use it or lose it” rule, which means the employee must spend all their funds by the end of the year or lose it. The employer may include a carryover or grace period, which gives the employee more flexibility with their funds. A carryover lets an employee carry up to $500 of their FSA funds to the next plan year, but thanks to the CARES Act, employees can now carry over $550. A grace period gives an employee up to an additional 2.5 months past the plan year to incur medical expenses.
- How to substantiate FSA claims? The IRS requires the employee to prove that the FSA purchase was eligible. In many cases, the employee will need to submit documentation that includes detail to prove the purchases are eligible.
- What expenses are eligible? FSAs cover a wide variety of purchases. For a complete list of eligible medical expenses, check out the IRS Publication 502.
With the Flexible Spending Account, the employer can provide an enhanced benefits package with another means for employees to pay for their medical expenses through an employee funded benefit plan. With employees electing on a pre-tax basis, the employer will see a reduction in their share of FICA and FUTA taxes. The employee will see an increase in their take home pay due to their funds being transferred on a pre-tax basis, helping to save on federal, state, Social Security, and Medicare taxes. The employee will have access to pay for their qualifying medical expenses with a quick swipe of a debit card and can use the online portal or mobile app to make the reimbursement process easier.
Still have more questions about the Flexible Spending Account? Call BASE® at 888-386-9680 or visit www.BASEonline.com for more information!