When evaluating Health Flexible Spending Accounts, consider these pros and cons.
1. Employee Tax Savings
Employees contribute to their FSA through payroll deductions, taken out on a pre-tax basis. This means the money is deducted from pay before taxes have been withheld. Thus, employees’ taxable income is lowered, which in turn reduces the amount of taxes paid. This also means employees save on the cost of medical care, because they use pre-tax dollars.
2. Employer Tax Savings
Employers also save money with FSAs by not paying wage taxes on FSA contributions. Each $100,000 of salary foregone by employees in favor of FSA contributions saves an employer $7,650 (7.65%) in FICA and FUTA taxes.
Health FSAs allow employees to save for anticipated medical savings throughout the year.
4. Full Balance Available on Day One
As a benefit to employees (but a “con” for employers), employees’ full annual contribution amount is available on day one. Employees can withdraw funds from the FSA to pay for qualified medical expenses, even if they have not yet placed the funds in the account.
1. Annual Contribution Limits
With Health FSAs there is an annual contribution maximum which limits how much you can contribute each year ($2,550 in 2015).
2. Limited Rollover
A drawback of Health FSAs is there is limited (or no) annual rollover. Employers may allow up to $500 to roll over at the end of the year, otherwise any unused funds are forfeited at the end of the year.
3. Not Portable
Unlike Health Savings Accounts (HSAs), Health FSAs are tied to employment, and are not maintained if the employee is no longer working for the employer.