Due to continually rising health care costs, many employers find it difficult to maintain current benefit levels. In this environment, even fewer are in a position to improve their group benefit programs. Internal Revenue Code Section 125 offers an option for employers who want to enhance their benefit programs without incurring considerable costs – a Flexible Spending Account (FSA) program. HealthSmart administers FSA plans as a stand-alone service or in conjunction with our claims management service.

The FSA is funded with employee salary reductions and though most employers pay for the administration of an FSA plan, the cost can be passed on to employees if needed. The overall savings for both employees and employers make the FSA program an inexpensive benefit option that's hard to beat.

Sample Employee Savings

A Flexible Spending Account program allows employees to fund for out-of-pocket health care expenses and dependent care expenses with tax-free dollars. This can potentially save each employee hundreds of dollars in taxes. Pre-tax dollars are exempt from federal income tax, social security tax (subject to FICA wage base), state income tax (limitations in a few states), and most local income taxes. The illustration below shows the potential employee savings generated by the use of a Healthcare and Dependent Care Flexible Spending Account program.

Annual Health Care Election * $650.00
Annual Dependent Care Election * $2,800.00
Total Annual Election $3,450.00
Estimated Tax Bracket ** x 22.65%
Annual Tax Savings $781.43

* National average elections.
** Assumes 15.00% federal income tax and 7.65% FICA tax. Additional savings may be realized on state and local taxes.

Sample Employer Savings

When employers offer Flexible Spending Accounts to their employees, employers save on total payroll costs by reducing the amount of Social Security and Medicare taxes employers pay. Below is an illustration of the types of savings an employer will gain from offering an FSA. Additional savings may come from FUTA, SUTA and Workers’ Compensation taxes. The sample assumes 500 employees with average wage of $36,953. (Resources: 2005 National Average Wage Index / 2006 Hewitt Associates study.)

  Without FSA With FSA
Annual Payroll $18,476,500 $18,476,500
Health Premiums
(average contribution $1,678)
$839,000 $839,000
Employee FSA Contribution for Healthcare
(average participation 18% at $650)
n/a $58,500
Employee FSA Contribution for Dependent Care
(average participation 3% at $2,800)
n/a $42,000
Adjusted Payroll $18,476,500 $17,537,500
Social Security Tax (7.65%) $1,413,452 $1,341,581
Less FSA Administration Fee n/a $5,302
Employer Tax Savings with a FSA n/a $66,569

FSA Process

Prior to the beginning of the year, employees elect to have a set amount deposited into their Healthcare and/or Dependent Care Flexible Spending Account. The amount should be equal to the eligible expenses they estimate they will incur during the year. The elected amount is withheld in equal payroll deductions throughout the year. As employees incur eligible expenses, they simply submit a claim and are reimbursed from the money in their Healthcare or Dependent Care FSA.

Variety of Eligible Expenses

Many employees will incur certain healthcare and dependent care expenses which are not reimbursed through insurance, and an FSA can provide employees with a way to pay these expenses on a pre-tax basis. Below is just a few of the types of expenses covered by an FSA.

Eligible Healthcare Expenses
  • Deductibles and co-payments
  • Charges over reasonable & customary
  • Routine physical exams
  • Dental and orthodontic expenses
  • Prescription drugs
  • Psychiatric care / substance abuse treatment
Eligible Dependent Care Expenses
  • Baby-sitting expenses
  • Day care center fees
  • Nursery school fees
  • Adult day care center fees
  • Wages for at-home care giver

An Enhanced Way to Use An FSA: The Benny Card

Benny Card ImageHealthSmart can administer additional FSA services, such as a benefit card program. Employers have the option of providing their employees with the convenience of a benefit card that acts like a debit card. The card lets employees pay for qualified expenses automatically at the point of sale, directly from the appropriate account. It electronically accesses funds held in the employees Flexible Spending Account, and reduces the need to pay cash up front, submit paper claims and then wait for reimbursement. HealthSmart partners with Evolution Benefits, and its premier product, The Benny™ Prepaid Benefits Card. After employees enroll in the FSA benefit program, each receives a Benny®card and an agreement detailing all terms and conditions for use of the card.