7 Most Common Questions From Employers About Spending Accounts
Employee spending accounts are a terrific benefit for employees, but if administering these plans has ever left you with feeling overwhelmed, you're not alone.
Some of the most common questions we receive at PaySteady are about the various spending accounts and how to administer them. We've compiled a list of the most common questions we receive from clients below.
1. What is the difference between a FSA and HSA?
Both Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are designed to provide tax savings on healthcare costs. In order to participate in a HSA you must be enrolled in a high deductible health plan (HDHP) that will cover very little up front costs. A HSA can be attached to an individual HDHP or an employer sponsored HDHP. A FSA may be offered to an employee as a piece of their employer sponsored benefits package, but cannot be set up by an employee on their own. It is important to note that if you qualify for a HSA, you cannot elect to have both a HSA and FSA, unless the FSA is a “limited-purpose” FSA.
Contributions to a FSA can be made by either the employee and / or the employer, but cannot exceed the maximum contribution limit for the calendar year. Employee contributions to a FSA account come out of the employee’s paycheck before taxes are withheld. Any contributions may be spent on qualified medical expenses and must be used within the same calendar year, with some exceptions that we will review below. If an employee leaves the company, they may be required to forfeit the money depending on how their specific plan is set up.
A HSA is an employee owned savings account that can be funded with employee and / or employer contributions, but cannot exceed the maximum contribution limit for the calendar year. HSA contributions by the employee are withheld from their paycheck before taxes are calculated. The funds accumulated in the HSA may be spent on qualified healthcare expenses until a person reaches retirement age. An employee is not required to spend the money within a specific timeframe and can take the money with them if they choose to end their employment with the current employer.
2. Do employees have to spend the FSA and HSA funds within a certain period of time?
HSA monies, whether the contributions are made by the employee or employer, belong to the employee. The money is theirs to spend on qualified medical expenses as regulated by the IRS. If an employment ends for an employee, whether it be voluntarily or involuntarily they are still entitled to the money in their savings account.
In general, FSA funds must be spent by the end of the year, typically referred to as "use-it or lose-it." However, employers may offer their employees one of these options:
1. Grace period: Allows for a maximum of an additional 2.5 months to use all money in the plan for expenses incurred the following plan year. For example, March 15, 2020, for a plan year ending on Dec. 31, 2019.
2. Carryover: Allows for up to $500 to be carried over and used anytime in the following year.
Employers can offer either option (not both) or no option. Employers can offer only one of these, but are not required to offer either.
3. How much can employees contribute?
The amount employees can contribute to either type of plan is determined by the IRS each year. A huge benefit to both employees and employers is that the payroll deductions come out of the employee's paycheck pre-tax, lowering the employees taxable income.
The 2020 contribution limit for Medical and Limited FSAs is $2,750, while the limit for Dependent Care FSAs is $5,000. 2021 limits for FSA plans have not yet been released.
For HSA contributions, the limit for individual coverage in 2021 is $3,600, up from $3,550 for 2020. For family coverage, $7,200 is the 2021 limit, up from $7,100 for 2020.
4. How do I fund my employees' FSA or HSA accounts?
Employees make a contribution election during open enrollment and they are entered into payroll as pre-tax deductions. Those funds are deducted from the employee's pay and will then be the employer’s responsibility to ensure the funds make it to the HSA or FSA plan administrator. One of the benefits that PaySteady offers is that we can automate the deposits into the employee’s spending account so that the employer does not need to lift a finger! One less thing on your already-full plate - click here if you’re ready to simplify your company’s back office processes!
5. How can an employee change a contribution election?
Most employees choose their contribution during benefits open enrollment before the beginning of the plan year. Contributions in a HSA account can be changed at any time.
FSA contributions traditionally are made and changed only during open enrollment or a qualified life event. Qualified life events include marriage, birth, death, divorce and employment status change. However, the IRS provided COVID-19 guidance for FSA plans in 2020, allowing for a mid-year change in contributions, longer grace period for 2019 contributions and an increased rollover contribution to 2021 FSA accounts. This guidance says employers may allow these options, but employers don’t have to participate.
6. What is a Cafeteria Plan / Premium-Only-Plan and why do companies need it?
In order for a company to offer employee healthcare deductions on a pre-tax basis, the IRS requires the company to have a Cafeteria Plan / Premium-Only-Plan in place. They are also referred to as a Section 125 Plan because they are described in Section 125 of the Internal Revenue Code. These are typically set up through a third-party administrator; however, PaySteady can help connect the dots!
We hope this is helpful! As always, we welcome your questions anytime at 703-672-1225 or firstname.lastname@example.org.