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Flex Spending

Flexible Benefits Plans


What are flexible benefits plans?

Flexible benefits plans enable workers to select benefits they want or need from a package of plans offered by their employer. Employers often include choices such as retirement benefits like 401(k) plans, health, dental or vision insurance, and reimbursement accounts through which individuals can pay for medical and/or dependent care expenses. Employees pay for these benefits through pretax payroll deductions; this lowers the employee’s taxable income and increases their take-home pay while reducing the employer’s tax liability. There are several different types of flexible benefits plans, including flexible spending accounts and cafeteria plans.

Cafeteria Plans

Established by the Revenue Act of 1978 and regulated by Section 125 of the Internal Revenue Code, cafeteria plans allow employees to choose certain nontaxable benefits as offered by their employer.  Benefits offered can include medical reimbursement plans for uninsured expenses; health, dental or vision insurance; 401(k) retirement plans; group life insurance; disability insurance; and child or elder day care. Vacation days may also fall under the selections offered through a cafeteria plan.

Flexible Spending Accounts

A flexible spending account (FSA) is a tax-deferred savings account set up by the employer on behalf of the employee. Funds are deposited pretax and can be withdrawn to cover medical or dependent care fees not covered by the employee’s insurance plan.

What types of expenses are covered under a reimbursement plan?

The premium only plan allows health insurance premiums to be paid with pretax dollars. The health flexible spending arrangement plan also allows for reimbursement of medical expenses not covered by insurance as well as dependent care expenses. Examples of reimbursable medical expenses include copayments, prescription drugs, doctor visits, dental expenses, eye exams, eye glasses, contact lenses, medical equipment and x-rays. For dependent care expense purposes, an individual qualifies as a dependent if that individual is under the age of 13 or is physically or mentally incapable of self-care and spends at least eight hours a day in the employee’s household. Examples of reimbursable dependent care expenses include day care, preschool, after-school care, summer day camps and adult day care.

How it works:

Through regular payroll deductions, an employee directs money into a premium only plan, a health flexible spending arrangement account or a dependent care flexible spending account on a pretax basis. During the year, the employee can be reimbursed directly from his or her FSA for medical expenses or dependent care expenses incurred by the employee, the employee’s spouse and the employee’s dependent(s).

Example of flexible benefits plan savings for employees:

In this scenario, an employee is paid $450 each week and is claiming single with two allowances in a state with no income tax.

 

Payroll   computed using after-tax deductions

 
 

 

 
 

Payroll   computed using pretax deductions

 
 

Gross wage

 
 

$450.00

 
 

 

 
 

Gross wage

 
 

$450.00

 
 

 

 
 

 

 
 

 

 
 

Medical insurance

 
 

 $50.00

 
 

Taxable wages

 
 

$450.00

 
 

 

 
 

Taxable wages

 
 

$400.00

 
 

FICA

 
 

 $34.43

 
 

 

 
 

FICA

 
 

 $30.60

 
 

Federal Tax (15%)

 
 

 $67.50

 
 

 

 
 

Federal Tax (15%)

 
 

$60.00

 
 

Medical insurance

 
 

 $50.00

 
 

 

 
 

 

 
 

 

 
 

Net pay

 
 

$298.07

 
 

 

 
 

Net pay

 
 

$309.40

 
 

Difference per pay

 
 

+$11.33

 
 

Annual difference

 
 

+$589.16

  

Flexible benefits plan rules:

Employers who wish to begin a flexible benefits plan must have a permanent plan document that includes a description of benefits and information on eligibility rules, election procedures, contribution processes, employer contributions and the defined plan year.

Flexible spending accounts remain in effect for one year unless an employee has a qualified change of status event. Additionally, the funds in flexible spending accounts do not roll over to the next plan year. As a result of this “use it or lose it” policy, employees should carefully research their medical and/or dependent care expenses to determine the correct contribution amounts. Employees are limited to contributions equal to health insurance premiums for the premium only plan, $5000 ($2500 for single filing by a married individual) for the dependent flexible savings account and, for plan years beginning in 2013, the limit for health flexible savings arrangements is $2,500.

What do flexible benefits plans mean to employers?

Employers offering flexible benefits plans to employees not only gain the benefit of enhanced recruiting and retention efforts by offering a well-rounded benefits package to potential employees, but they also realize a reduction in employer-paid payroll taxes. This reduction can add up to thousands of dollars in tax savings for employers.

Flexible benefits plan contributions are reported on From 940; however, they are not subject to federal income, Social Security, Medicare or FUTA taxes. Employers with 100 or more active participants are also required to complete Form 5500, Annual Return/Report of Employee Benefit Plan.

IRS Publication 15-B, chapter 1, contains additional information on flexible spending plans, specifically cafeteria plans and FSAs.  As rules on flexible benefits plans may change on a per state basis, employers should check for state-specific regulations. The advice of a qualified human resources advisor or plan provider should be sought for specific flexible spending plan-related questions.

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