Summary

Flexible spending accounts allow employees to put away pre-tax money from their paychecks to cover medical expenses. In some cases, a portion of unused funds can roll over to the following year (or there may be a grace period), and is only available while the employee is still working with the company.

What are flexible spending accounts?

Healthcare in America is expensive. 79 million Americans deal with medical debt or billing struggles, up 34% from 2005. Even for those with insurance, medical bills can be just plain costly and stressful.

Flexible spending accounts (FSAs) allow employees to put their pre-tax income into a savings account for medical expenses. These savings can cover a wide range of out-of-pocket expenses: birth control, prescriptions, bandages, insulin, breast pumps, crutches, menstrual pads and tampons, mental health therapy, cold & flu medicine, and much more.

Because the money placed into these savings accounts are pre-tax, it reduces your employees’ taxable income (contributions can go up to $2,850/year), as well as an employer’s payroll tax amount (7.65% of contributions). This saves both the employee and employer money.

Most FSA programs cost employers only about $5/month for each employee, but can save them much more — effectively making them money.

How do employees use flexible spending accounts?

Your office administrator makes $40,000/year. And each year, he spends about the average $1,200 on out-of-pocket expenses on healthcare. This goes to filling that medicine cabinet, the odd prescription, and other one-off over-the-counter expenses.

This year, your office administrator has enrolled in your FSA program, opting to deposit $100/month. That takes $1,200 off his taxable income, saving him almost $150/year on out-of-pocket medical expenses, a 12.5% savings. That $150 will go right back in his pocket.

FSAs also allow for immediate access when needed, even before the full year has been paid. So when your office administrator sprained his ankle playing basketball in March, he could use his FSA to cover up to $1,200 (the amount they allotted for their FSA during enrollment) for crutches, a boot, and prescription pain meds, even though he had only contributed $300 up to that point.

He’ll also have the option to change his allotment accordingly during the following enrollment renewal period. This means that if he determines that his contributions overshot his expected health needs, he can adjust.

How do flexible spending accounts impact employees?

Nobody wants to plan for medical bills. But they’re kind of inevitable. Even if you’re (mostly) healthy, you’ll probably rack up some expenses over time, sometimes without even thinking about it.

Sometimes they rack up a little too fast – and that can become a big problem. 50% of Americans hold some form of medical debt, and one in five have healthcare bills in collections.

But with an FSA, next time a surprise medical bill lands in your mailbox, you know for sure where that payment will come from. How’s that for peace of mind?

FSAs support your employees in preparing for their medical expenses, saving money, and in some cases rolling over up to $570 of unspent money from one year to another. An FSA can help your employees evaluate and plan for their expected expenditures, while saving them money and providing a little adaptability in the event of an emergency.

No wonder they’re called flexible spending accounts! In short, this flexibility helps create a safety net for your employees while helping stretch their hard-earned dollars farther.

Why should employers offer flexible spending accounts?

The low cost of implementation for FSAs make them an easy benefit to roll out. They essentially pay for themselves, and then some.

If you account for the average contribution an employee puts into an FSA ($1,350) and the resulting payroll tax savings, employers basically “make,” on average, $43/year for each enrolled employee. That may not seem like much on its own, but those numbers add up quickly.

Medical expenses can be unavoidable, but an FSA can help your employees level up their financial resiliency against these costs. This shows them that their employer is willing to go the extra mile to help their employees save money wherever they can.

Employers everywhere are always looking for ways to set them apart in an effort to draw talent and keep their teams feeling appreciated. FSAs are quickly becoming an important addition to that process and any competitive benefits package. While it may not be the star of your benefits suite, the FSA can be one of those lil’ details that shows your employees you value them.

What are the best flexible spending account (FSA) providers?

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