Should My Business Consider Offering a Flexible Spending Account?
Written by Complete Payroll
About 74% of large employers and 23% of small businesses offer Flexible Spending Accounts for their employees’ health care. FSAs are a welcome addition to a company’s benefits package, helping employees feel that the company is invested in their good health.
Is your company considering offering an FSA? Before you make the decision, here are some things to keep in mind.
FSAs are attractive to job searchers
Fully 60% of people say benefits are a major factor in searching for a new job. After pay, benefits are the #1 thing people consider before accepting a new job offer. Benefits are a deal-breaker if they’re not good enough.
An FSA rounds out your benefits package and helps you stay competitive in the employment marketplace. When job seekers see that you offer an FSA as part of your plan, they’ll mentally rank you above other companies with less competitive offerings.
FSAs boost employee retention
FSA can encourage employees to stay with you for the long term. A recent study found that flexible benefits - those that are personalized and adjustable to the individual employees - are a major contributor to employee happiness.
An FSA offers personal choice and helps your employees solve problems in their day-to-day lives. From their perspective, the company is offering something that contributes to a positive outcome.
Use instead of/in addition to health insurance
FSAs are quite flexible for the company. Offer them in addition to an existing plan, or use them in place of another type of health care plan.
However, it’s not usually a good idea to directly eliminate a health care plan then replace it with an FSA. This feels like a net loss to employees, and if handled incorrectly it can put you in hot water with the Internal Revenue Service (IRS) and Affordable Care Act (ACA).
An FSA can be better than a raise
A whopping 80% of people would choose having better benefits over having a pay raise. The primary reason: families. Benefits, especially health benefits, go beyond the individual employee and help their entire family have a better life.
When it comes to FSAs, there’s another big reason why they’re better than a raise. They help employees make the most out of their salaries by lowering their taxable income. An FSA reduces your employees’ tax burden - and your own - while creating a built-in way for people to save for emergencies.
Employees are wary of “use it or lose it”
Many U.S. workers are confused about how FSAs work, particularly in terms of the carryover rule, also known as the rollover rule or “use it or lose it” rule. Previously, FSA dollars couldn’t be rolled over into the next year, and you’d lose any dollars not used.
However, the IRS re-evaluated the carryover rule several years ago. They added a grace period of up to 2 months and 15 days, then announced that $500 of unused FSA balances could be rolled over to the next year. Employers aren’t required to follow this rule, but they’re encouraged to do so because it makes FSA plans much more appealing to their employees.
FSAs are costly and complex for employers
Despite all the positives about FSAs, for employers they can be difficult to manage. These programs are complex and require a lot of paperwork.
Plus, the employee doesn’t pay for the FSA administrative costs - you do. Each employee funds the FSA itself out of their payroll deductions, of course, but they pay no fees. That’s the responsibility of the employer.
As an employer, you handle the annual and monthly fees for the FSA accounts, on top of any optional contribution you choose to make. In 2018 the annual limit on a medical FSA employer contribution is $2,650 and the 2019 limit is $2,700.
Adding an FSA
Here’s the bottom line: An FSA is a desirable benefit for employees and is usually worth the cost to the employer - especially if you get help with administering the program. Connect with a benefits administration company so adding an FSA is smooth and hassle-free.
Check out our resource page on the Affordable Care Act - a comprehensive guide for employers to best understand the law and how it impacts their employees and their business.