Pros and Cons of a Health FSA

FSA and a piggy bank

We work hard for our money, so it is important to spend it in the most effective ways possible. A health flex spending account (FSA) allows you to use pre-tax dollars to pay for out-of-pocket health care expenses that are not covered by insurance that you would normally need to pay for with out-of-pocket after-tax money.

An FSA also allows you to pay for any eligible medical expenses for your spouse or eligible dependents. A listing of the covered and excluded expenses is provided below. Proper documentation is required, and if you are not sure if an expense may be eligible contact your FSA provider to check.

Eligible FSA Expenses:

  • Prescriptions
  • Co-Pays
  • Dental cleaning and procedures
  • Eye and hearing exams
  • Physical exams
  • Acupuncture and chiropractic care
  • Allergy and sinus medicine
  • Prenatal vitamins
  • Over the counter drugs

Excluded FSA Expenses:

  • Drugs store items (such as hygiene products)
  • Cosmetic procedures
  • Insurance premiums
  • Adult daycare
  • After school care or extended day programs
  • Agency fee for childcare

When selecting an FSA during open enrollment, an employee must specify how much they would like to contribute to the FSA for the year. The tricky part is choosing an amount that will cover medical or dependent care expenses, but that is not so high that the money will be forfeited and wasted at the end of the period.

Pros:

  1.  Employee Tax Savings
    Employees save money with FSAs by not paying wage taxes on FSA contributions.
  2.  Employer Tax Savings
    Employers also save money with FSAs by not paying wage taxes on FSA contributions. Each $100,000 of salary foregone by employees in favor of FSA contributions saves an employer $7,650 (7.65%) in FICA and FUTA taxes.
  3. Medical Savings
    Health FSAs allow employees to save for anticipated medical expenses throughout the year, so they are not burdened by the large expense when incurred.
  4. Full Balance is available on day one
    As a benefit to employees (but a “con” for employers), employees’ full annual contribution amount is available on day one. Employees can withdraw funds from the FSA to pay for qualified medical expenses even if they have not yet paid towards the funds in the account.

Cons:

  1. Annual Contribution Limits
    With Health FSAs there is a yearly contribution maximum which limits how much you can contribute each year. (Salary reduction contributions to your FSA can’t be more than $2,550.)
  2. Limited Rollover
    A drawback of FSAs is that there is limited to no annual rollover. Employers may allow up to $500 to roll over at the end of the year. Otherwise, any unused funds are forfeited. The IRS allows employers to offer an extended deadline, or grace period, of two and a half months after the end of a plan year to use FSA funds. Thus, for a plan year ending Dec. 31, the employees would have until March 15 to spend the money in their FSA. This provision is strictly optional; the employer must choose to implement it.
  3. Not Portable
    Unlike Health Savings Accounts (HSAs), Health FSAs are tied to employment and are not maintained if the employee is no longer working for the employer. Money left unused in your FSA goes to your employer after you leave or lose your job unless you are eligible for and choose COBRA continuation coverage of your FSA.

Flexible spending accounts are an attractive fringe benefit for employees. Small business owners should consider implementing them now and beyond so employees can plan for their contributions while making their dollars earned work a bit harder for them in this capacity.

Written by Isabel Gastulo