What are Flexible Spending Accounts (FSA)?

Section 125 of the Internal Revenue Code authorizes the establishment of cafeteria plans. These plans allow an employee to "purchase" certain nontaxable benefits in lieu of receiving taxable cash compensation.  A certain type of cafeteria plan called a Flexible Spending Account enables employees to set aside money on a pre-tax basis to reimburse qualified medical and dependent day care costs.

Who can benefit from Flexible Spending Accounts

The employer and employees can both benefit from a Flexible Spending Account.  The Flexible Spending Account allows the employer to offer a new benefit for their employees without a large premium or plan contribution required.  Employees have increased take home pay because pre-tax dollars are taken for the contribution, which in turn reduces their tax bracket and income taxes.  Employers get a lower payroll tax as well.

Employees can get cheaper dependent care because it is not taxed while using a Flexible Spending Account.   The Flexible Spending Account also helps employees throughout the year meet their expenses by regularly deducting directly from their pay.

What expenses can be included in a Flexible Spending Account plan?

There are many expenses that can be covered under a Flexible Spending Account.  Some include:

• Medical expenses, such as orthodontics and chiropractic care, not included in employee health plans

• Deductibles and co-pays under a medical or dental plan

• Hearing and Vision expenses

• Health and Dental expenses over the amount covered by a medical or dental plan

• Babysitters and licensed daycare centers

• Services outside the home for the care of a dependent or spouse

• A relative for dependent care services

How do FlexibleSpending Accounts help your employees save money?

A Flexible Spending Account increases take-home pay because pre-tax money is used to pay for expenses that would otherwise be paid for with after-tax dollars.  This is an example of how an employee saves:

How does Nyhart establish and administer Flexible Spending Accounts?

In the consulting phase, Nyhart establishes program objectives and then develops plan design and benefit provisions based on those objectives.  Nyhart also prepares materials to help employees understand their benefits and answers any questions that they may have.

Individual accounts are set up based on the participant enrollment and election information.   These accounts are maintained and tracked on an individual basis.   Reimbursement requests are processed and paid after receipts are checked to ensure all requirements are met.  Employers are given the option of using a debit card plan instead of submitting paper claims.

What Procedure do employees follow when using a Flexible Spending Account?

Here is a set of sample steps to do when participating in a Flexible Spending Account:

• Estimate expenses for the plan year

• Select the amount of pre-tax dollars to be deducted for the year.  This should be based on the estimated expenses.  Each pay period, a portion of that amount is duducted from the employee's paycheck and put into their personal account.

• Complete a Flexible Spending Account Election Form

• Complete and submit a Flexible Spending Account Claim Form as expenses are incurred.  The expenses up to the annual contribution chosen will be reimbursed as long as they qualify as eligible expenses

• OR, if the employer chooses the debit card plan, a debit card can be used to pay for the expenses

• Prior to the start of a new plan year, employees are permitted to make new elections based on changes in circumstances

There are a few important notes under this type of account:

• At the end of the plan year, any pre-tax dollars remaining in the account are forfeited.  The balance cannot be carried over or paid out in cash.

• Expenses that are reimbursed from a Flexible Spending Account cannot be claimed as deductions on income tax returns

• Expenses must have been incurred during the plan year, or a specified period of time allowed after the plan year

Debit Card Plan

A feature in Flexible Spending Accounts is the debit card plan.  Each emplyee is given a debit MasterCard that can be used to pay for their medical expenses without having to pay for the expense and then wait to be reimbursed.  This makes Flexible Spending Accounts more convenient.

Substantiations

When using the debit card plan, the employer sets up certain co-pays for prescriptions and office visits.   If the debit card is used and the expense matches one of the established co-pays, the expense will be automatically approved.  If the expense is not one of the established co-pays, a letter will be sent to the employee asking for a substantiation, or proof of services rendered and date of service.  This form should be returned and proof of services should be attached so the expense will be approved.

Nyhart Services

• Toll-free number to customer service personnel

• Quarterly employer reports

• Centralized billing services

• Maintain accounting of benefits paid to each participant

• Quarterly spending and annual account statements

• Form 5500 preparation