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4 Types of FSAs & How They Work
Article originally posted on www.insuranceneighbor.com(opens in new tab)
An FSA, or “Flexible Spending Account,” can be an excellent benefit to offer your employees, and to your business bottom line, as the contributions are pre-tax. Several types of FSAs are available:
Medical Expense FSA
These accounts pay for eligible medical costs, prescription drugs, copayments, deductibles, medical devices, and other costs. Another option, a “limited medical FSA,” can cover the cost of preventative healthcare services, along with eligible dental and vision costs.
Dependent Care FSA
These accounts are established as a benefit to employees, allowing them to reduce the cost of childcare, adult day care, and programs offered before and after school. In 2022, unused balances from 2020 and 2021 can be carried over.
Adoption Assistance FSA
An FSA can be established to offer employees financial assistance for the adoption process, up to specific limits, and allows both employer and employee to enjoy tax benefits.
These accounts allow the employees participating in the plan to pay for eligible vision, dental, or preventative care up to the limits set by the IRS. Once the deductible amount is reached, the account converts to a medical FSA. These FSAs may be offered by an employer in combination with a high-deductible health insurance plan.
Contribution Limits for an FSA in 2022
The IRS yearly sets the contribution limits. For 2022, the contribution cap was increased to $2850 per employee. Employees can contribute this amount to the FSA in 2022. Some plans allow any unused funds to carry over, at a limit of $570. Limited purpose FSAs that can only pay for dental and vision care can be used in conjunction with an HSA (Health Savings Account).
If the employer contributes to the FSA, the amount is in addition to the limit for the employee. The employer is allowed to match funds up to $500 per employee, whether the employee contributes to the account or not. Over $500, the employee can contribute only the amount the employee has paid into the account.
American Rescue Plan and Pretax Contributions to FSAs
The contribution limits for Dependent Care FSA plans were increased to $10,500 for single and married people who file taxes jointly, and to $5,250 for married couples who file separately up to December 31, 2021. For 2022, the maximum salary deferral is set at $5,000 for couples filing jointly and $2,500 for couples filing separately.
The Right FSA Plan for Your Business
Planning employee benefits is a task that must be reviewed every year, due to changes in law, IRS rules, and new insurance plans becoming available on the market. Crafting the most attractive plan that provides the benefits employees want, along with tax savings to the business, requires evaluating your current benefits and determining whether an FSA could be the best option.
With the help of an experienced local insurance agent, it is advised to have a full review of your current benefits, the plans available, and the tax savings your business could enjoy. A professionally crafted benefits plan could help you attract and retain the employees you want on your team, for the long term.Filed Under: Group Benefits | Tagged With: Group Benefits