What are the options? FSA Setup Decisions

A new Flexible Spending Account (FSA) program presents an employer with a number of decisions with respect to the operations and features of the plan. Here are the primary things an employer needs to consider:

  1. What will the Healthcare Account maximum be for the plan year?  The IRS sets the maximum allowable each year, but employers may elect a smaller amount. There are advantages and disadvantages for picking the maximum allowable amount.

    • Advantages: More tax savings for those who elect the maximum IRS amount. More FICA tax savings (7.65%) to the employer for those who elect the maximum IRS amount.
    • Disadvantages: The employer is on the hook in the case where someone elects the maximum amount, receives it in reimbursements, then terminates employment taking more with them than they contributed. Having a high maximum is greater exposure to the employer. However, if employee turnover is low, there is a lower risk of this happening.

  1. Will you offer debit cards, or not? There are advantages and disadvantages to offering debit cards from both the employee and employer perspective.

    • Employee Advantages: Simplicity. Swipe the card, the provider is paid. No financial hit to the personal pocketbook.
    • Employee Disadvantages:
      • Backup/claim substantiation is still required. If an employee does not submit it, the card will be blocked from further use.
      • Sometimes a card is used incorrectly to pay an expense in a different plan year.  Sometimes a participant is unwilling or unable to provide backup for the card swipe. The employee must reimburse the employer for this ineligible card swipe.

    • Employer Advantages: More employees will sign up for the FSA with a debit card than without one.

    • Employer Disadvantages:

      • More administrative work than without cards. Two reconciliations are required of 1) actual paid claims and 2) claims that have been paid but not substantiated.
      • Employees complain about having to provide backup/claim substantiation.
      • Employees complain when their cards are turned off after ignoring four emailed requests for backup/claim substantiation.
      • Employees are embarrassed when their employer asks to be repaid for an ineligible card swipe.

  1. Who will provide reimbursement of manual claims submitted to SBA?  Participants can be reimbursed either by 1) the employer or 2) direct deposit initiated by SBA. In the case of direct deposit, we would collect the employer’s bank name, routing number and account number. We would also need to collect the same from each FSA participant. In both cases, SBA adjudicates claims received Monday through Sunday to ensure they are eligible expenses and incurred during the current plan year. Each Tuesday, SBA will notify the employer of which participants need reimbursement and for how much. The Tuesday notification will either say:

    • Please reimburse these participants these amounts, or
    • We will reimburse these participants these amounts. You’ll receive this with a note that says: “Please make sure there is enough money in your bank account because tomorrow we will initiate a debit from YOUR bank account and credit the personal bank accounts of each participant.”

  1. Which of the 3 options will you adopt for your use-it-or-lose-it provision?
    • A 12-month plan year with 60-day run-out. Anyone with an unused balance at the end of 60 days after the plan year ends will lose it.
    • A 12-month plan year with an extra 2.5 month extended grace period feature to spend down an unused balance. Essentially it makes it a 14.5-month plan year with a 60-day run-out.
    • A 12-month plan year with a 60-day run-out and a $610 carryover feature.

Here’s a comparison of the 2.5 Month Grace Period and $610 Carryover features:

  2.5 month extended grace period $610 Carryover
How many months to spend down the unused balance 2.5 months 12 months
How much of the unused balance is available to spend down in the new year All the unused balance (no dollar limit) Up to $610 of the unused balance
How long must a participant wait to begin submitting claims incurred after the end of the plan year Immediately Only after the end of the 60-day run-out period allowed for the submission of claims incurred during a plan year.  All current-year claims must be reimbursed by the current plan year until an accurate old plan-year unused balance is recorded at the end of the run-out period.
Additional SBA administrative cost to the employer to administer two plan years simultaneously. $0.50 cents per employee per month $0.50 cents per employee per month

5. Have an HSA? Will you offer a Limited Purpose Health FSA, or not? If you offer an HSA-qualified medical plan with a Health Savings Account for your employees, you cannot offer a standard Health FSA program, however, you do have two alternatives:

    • To tell those enrolled in an HSA-qualified medical plan they cannot participate in the Health FSA (they reimburse the very same expenses), or
    • Tell them they can participate in a Limited Purpose Health FSA which reimburses dental, vision and non-deductible medical expenses. 

Why would anyone enrolled in an HSA-qualified medical plan with an associated HSA bank account want to enroll in the Limited Purpose Health FSA? 

    • Advantage 1: The entire annual Limited Purpose Health FSA election is available on the first day of the plan year. This would be attractive to someone with a small HSA bank balance.
    • Advantage 2: HSA bank account funds may be invested and earning interest. A big dental expense reimbursed through the Limited Purpose Health FSA would preserve the balance in the HSA account.
    • Disadvantage: Open enrollment communication is the biggest obstacle to offering a Limited Purpose Health FSA. Describing a Health FSA and a Limited Purpose Health FSA and who can participate is challenging. 

As a new SBA client, we will walk and talk you through all your options to determine which alternatives make the most sense for your business. We are also available to your employees at enrollment and beyond, to make sure they understand the plan and their options as well.



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