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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 &...
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.
The company may have to reimburse the plan if many employees use all their benefits before their termination. This is in case the company announces a plan of laying-off some of its employees. However, most companies do not announce lay-offs for particular employees with much information for employees to use all their benefits. Therefore, employees may lose all their contributions apart from losing their jobs (Garman & Forgue, 2012). The idea of pre-funding benefits to an employee who participates in a plan makes it a potential risk to the company. This is because the employer has to make the difference that the employee spends from the FSA from which his contribution is not yet available.
The plan's main disadvantage is that one should spend all the funds within the coverage time. This is during the plan year (Ferenczy, 2007). The remaining funds are to be available in the future, mostly under administrative costs.
References
Ferenczy, I.H. (2007). 2006-employee benefits in mergers and acquisitions. New York, N.Y: Aspen Publishers.
Garman, E.T., & Forgue, R.E. (2012). Personal finance. Australia: South-Western Cengage Learning.
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