Flexible Spending Accounts (Fsas) Flexible

Flexible spending accounts (FSAs)

Flexible spending account

A flexible spending account is a financial account that offers tax-advantage to employees. This is set through a cafeteria plan for employees in the United States. This plan allows one to set aside part of his salary to pay for other expenses that are in the cafeteria plan. It usually covers medical expenses but mostly deals with dependent care (Ferenczy, 2007). The money from the employee's salary into the plan does not undergo taxing. Therefore, this results to a large payroll tax savings. However, funds that the company does not use by the end of the year are lost to the employee, which leads to loss on the company's side.

Most companies offer medical expense FSA that allows employees to save money for health care plans. Unlike funds in FSA, funds in health savings account are not lost at the end of the plan year. This plan may allow employees to access their funds with a FSA debit card. Under medical FSA, this plan offers two different flexible spending accounts. These include; qualified medical expenses and dependent care expenses (Ferenczy, 2007). Different cafeteria plans offer different types of FSAs. This is especially when the employer offers an HAS. If one participates in one type of FSA, he can still participate in another. However, there will be no transfer of funds from one FSA to another.

Under medical expense FSA, funds under the plan pay for medical and dental expenses. These payments are not under insurance. The Patient Protection Act allows employers to enact maximum yearly election for their employees (Garman & Forgue, 2012). Employees can also choose to provide debit cards to their employees that participate in FSA. At the point of sale, employees can use the card to make payments for costs eligible under the FSA plan. These expenses can include payments at pharmacies and groceries. However, these stores cannot allow one to pay for expenses that are not under the plan.

Under dependent FSAs, an employee can pay for expenses that take care of his dependents. These can include taking care of children under the age of 13 or physically or mentally unable children. Moreover, it can also cover adult dependents such as parents and grandparents who live with the employee (Garman & Forgue, 2012). Therefore, the dependent claims the funds from the employee's federal tax return. This plan does not support long-term care for those parents who live far from the employee. This may include parents who live in nursing homes.

The FSA period expires when the plan year ends for the plan of an employee or when the coverage of an employee under the plan ends. For instance, one's coverage can end when an employee separates from his employer (Ferenczy, 2007). When an employee works for a company from January to August, his funds cover his expenses for between January and August. This is when the employer does not pay for continuation of the coverage under the plan. Therefore, the employee's coverage is from January to August. This covers expenses incurred as from January to August only.

Digitech can consider the following advantages and disadvantages of FSAs in deciding whether to introduce the plan. The employee's full contribution to the plan is available to the employee when the plan year commences. This is mostly January, or after the FSA vendor receives the first contribution of the employee to the FSA (Ferenczy, 2007). Therefore, the employee claims all the contributions when he encounters a qualifying event. In case the employee quits, he cannot repay the money to the employer. This is advantageous to the employee but disadvantageous on the company's side.

The employee also contributes small amounts to the FSA in the as the year progresses. For example, if one receives pay in every two weeks, he can contribute 1/26 of the yearly amount. When the employer receives all the contributions together, it sums up to the full average amount at any time. Therefore, the employer suffers no real risk. Moreover, the employer pays a little clerical charge to the plan instead of paying payroll taxes to the government (Garman & Forgue, 2012). This amount is comparatively less than the company would have had to pay for the payroll taxes. Moreover, the company takes the money that remains at the end of the plan year.