This chapter discusses the flexible spending account – a type of cafeteria plan that is funded through salary reductions. After discussing when such a plan might be used, advantages and disadvantages of doing so are covered. | What is it? A type of cafeteria plan that is funded though salary reductions elected by employees each year Employees choose between cash and specified benefits Copyright 2009, The National Underwriter Company When is it indicated? Employer wants to expand employee benefit choices while limiting additional cost to company Employee benefit costs have increased and employer must impose additional employee cost sharing FSA provides tax benefit for employees not available elsewhere Employer has sufficient number of employees, usually 25 or more FSA benefits cannot be provided to self-employed persons Copyright 2009, The National Underwriter Company Advantages Gives employees choice between cash or benefits Funded through employee salary reduction, employer has no additional costs except administrative costs Employer-paid payroll tax may drop since taxable payroll is reduced Salary reductions to fund nontaxable benefits under plan are not subject to federal income taxes Large list of potential nontaxable benefits under plan; including benefits not otherwise available to employee (. dependent care) Copyright 2009, The National Underwriter Company Disadvantages FSA must meet complex nondiscrimination require-ments imposed on cafeteria plan—administrative costs increase FSAs require employees to evaluate own benefit situation and file timely election form every year can be confusing and difficult unused funds are forfeited at year end Copyright 2009, The National Underwriter Company Disadvantages Administrative costs higher than in fixed benefit plan IRS proposed regulations require an employer to be ‘at risk’ regarding total annual amount employee elects to allocate to health benefits under his or her FSA Copyright 2009, The National Underwriter Company How it Works: Basic Features of FSA Plan Employer decides what benefits to provide in FSA and adopts written plan to provide these benefits Employer advises employees to review their benefit needs . | What is it? A type of cafeteria plan that is funded though salary reductions elected by employees each year Employees choose between cash and specified benefits Copyright 2009, The National Underwriter Company When is it indicated? Employer wants to expand employee benefit choices while limiting additional cost to company Employee benefit costs have increased and employer must impose additional employee cost sharing FSA provides tax benefit for employees not available elsewhere Employer has sufficient number of employees, usually 25 or more FSA benefits cannot be provided to self-employed persons Copyright 2009, The National Underwriter Company Advantages Gives employees choice between cash or benefits Funded through employee salary reduction, employer has no additional costs except administrative costs Employer-paid payroll tax may drop since taxable payroll is reduced Salary reductions to fund nontaxable benefits under plan are not subject to federal income taxes Large list
