What is an FSA?
When it comes to understanding your benefits, we know it can be easier said than done. After all, there’s a lot of confusing jargon out there — from mysterious acronyms to long, complex explanations, sometimes reading about benefits can feel more like reading a legal document.
Whether you’re an employee trying to do a bit more research on the benefits you’re offered, or an employer looking for resources to explain the benefits you’re offering your team, we’re here to help! We are happy to demystifying your benefits for you, starting with one of our favorite employer-sponsored benefits: the FSA.
What is an FSA?
An FSA (short for flexible spending account) is a tax-advantaged benefit account offered by many employers. If you’re not sure whether your employer offers them, try asking someone in HR! And if you’re an employer trying to figure out whether an FSA is the right fit for your team, we hope the following will help.
Flexible spending accounts are designed to be exactly that — flexible. If you are eligible for a FSA, that means you can allocate a certain number of pre-tax dollars throughout the year to cover qualified expenses, from dental and vision to dependent care. There are two kinds of FSA: Health FSAs, which cover healthcare costs, and Dependent Care FSAs which (you guessed it) cover costs associated with dependent care.
At the beginning of the year, employees can decide how much money they want to allocate to their FSA. In the case of Health FSAs, for instance, the annual maximum is $2,750 (as of 2020), so employees can elect up to the full amount at the beginning of the year, and those funds will be available for use immediately. Because that money is taken out of an employee’s paycheck before taxes, they can actually save quite a bit, so long as they’re savvy about budgeting. Not only do employees save big on income tax, employers can also save big on payroll taxes — that’s what we call a win-win.
How can FSAs help me?
As we mentioned above, one of the best things about FSAs is that they’re tax-advantaged, meaning they can be a real financial benefit to all parties involved. When you look up FSAs, you often see warnings about a “use it or lose it” policy, but we happen to think that fear is a little overstated. Although it’s true that your elections generally don’t roll over from one year to the next, there are plenty of amazing eligible benefits, so even if you accidentally elect more than you need, you’ll find a good way to spend the remaining money.
In our previous article on how to budget for your FSA, we list out a wide range of covered costs, including OTC medications, vaccinations, eyeglasses, flu shots, menstrual care products, and more. The FSA store is an amazing resource for FSA eligible products — you’ll be shocked how many everyday items you can spend your pre-tax dollars on!
On the employee side, the “benefit” of this benefit is obvious: not only is it a convenient way to allocate a budget to healthcare costs, it’s also an easy way to save on taxes, since by contributing to an FSA employees reduce their taxable income.
As far as employers are concerned, FSAs are also a great option. Not only do they help save on payroll tax, as mentioned above, they are also a low-cost way to build an attractive benefits package, which will help recruit and retain talented employees. Of course, as with any benefits package, there are complications. There is certainly plenty of paperwork, and between ensuring employee engagement and tracking compliance, FSAs can take up quite a bit of your time. Luckily, partnering with a company like Benepass can help—we take care of the compliance and the paperwork so you can focus on what’s really important: giving your employees the benefits they need to succeed.
If you have any questions about FSAs or would like to schedule a demo, feel free to reach out to us at email@example.com.