Dear Tom and Alan:
I have a small business with five employees on my group health plan.
I’ve had to change the plan to the Bronze $6,000 deductible to at least try to keep my workers from bankruptcy if something catastrophic should happen.
I have read about, but don’t understand, tax-free ways to pay some of the out-of-pocket expenses.
Can you explain?
Tom: OK, George, here’s a pre-tax (not tax-free!) way to save: a Flexible Spending Account (FSA).
You or your employee can contribute pre-tax dollars to their FSA account. Visualize it as a bank account in the employee’s name.
As the year goes by, regular deposits are made to this account. “Regular” meaning per pay period: monthly, quarterly, etc. As the money accrues, the employee can use the funds for copays, co-insurance, out-of-pocket expenses.
Al: For 2018, the maximum an employee can contribute to this account will be $2,650. Although there is no limit on employer contributions, owners typically match the employee’s contribution up to the annual maximum.
I’ve always considered an FSA the “use it or lose it” program.
However, employers can adopt a carryover feature where the employees can roll over up to $500 that was not used. Another option is to extend the period two and a half months to spend the previous year’s funds.
Tom: A MetLife survey finds that for employee acquisition and retention, 61 percent of applicants say they are more likely to accept a job offer with these kinds of benefits.
A total of 59 percent say the benefits will make them more loyal. There were 27.4 million FSAs in use last year, and that is expected to grow to over 32 million in 2020.
Al: Here’s a wrinkle your CPA will love…there are different kinds of FSAs.
So far we’ve been talking about general-purpose FSAs.
There are also limited-purpose FSAs and dependent care FSAs.
An individual covered by a general purpose FSA may also contribute to a limited-purpose FSA (dental and vision).
What this individual cannot do is contribute to a Health Savings Account (HSA) … even if the group health plan is an HSA.
Tom: That one made my head hurt.
For someone on a general purpose FSA, there is actually a website called “fsastore.”
It begins with over-the-counter medicines and medical supplies that either do or do not require a doctor’s prescription. Bandages, hearing aid batteries, and many other things can be purchased using your FSA card without a prescription.
Acne treatments, allergy medication, eye drops, nicotine patches, and lots of others do require a prescription. After this initial group, there is page after page of “eligible products and services.”
These include: AA meetings; acupuncture; ambulance and emergency room; anesthesia; artificial limbs; maternity charges; etc.
Well, you get the idea. Pretty much anything remotely medical will probably qualify as a legitimate FSA expense.