FSAs boost employee income.

During the last 10 years, flexible spending accounts (FSAs) have become an important component of larger foundries' employee benefits plans. They are used to complement basic medical, dental and optical insurance plans as well as provide assistance in offsetting the high cost of dependent care. Since the mid-1980s, FSAs have become one of the fastest growing benefit offerings and can provide both large and small foundries with extra employee benefits while not affecting the bottom line.

FSAs allow employees to pay certain out-of-pocket expenses with pretax dollars. In other words, expenses paid through FSA plans are not subject to federal, state and FICA taxes for the employee or the employer. This results in increased spendable income for employees who use FSAs and minimal costs for employers who offer them. The most common types of expenses included in FSAs are:

* the portion of premiums an employee contributes toward employer sponsored benefit programs, such as medical and dental insurance premiums;

* health care expenses that are not reimbursed by a company's insurance plan;

* dependent day care expenses.

This concept may sound too good to be true, and, in some individual's cases, it is. The downside of a FSA is the restrictions imposed by the IRS. Accounts for health care (including premium payments) and dependent day care must be maintained separately, so the money designated for one account cannot be transferred to the other. In addition, any money left in a FSA account at the end of the plan year is lost by the individual contributor.

How FSAs Work

Separate accounts are established in the employee's name for health care expenses and dependent care expenses. The employee then instructs its company how much to deposit into each account over an entire year. Funds are then withdrawn from the accounts to pay qualifying expenses throughout the plan year.

The following example illustrates the tax savings offered by FSAs. For an employee that earns $24,000/year, family medical/dental coverage costs $334/year with additional medical, dental, orthodontia and optical costs of $2000. Without an FSA, the $2334 cost of health care is taken out of income after taxes, resulting in an estimated $18,172 for spendable income. With an FSA, the cost of health care is taken prior to taxes, resulting in less income to be taxed and $18,714 remaining for spendable income. This is a gain of $542.

Health Care FSAs

The money deposited in a health care FSA may be used to pay any health care expense that qualifies as a medical deduction under IRS income tax rules. Since the IRS doesn't permit an employee to receive a refund of the unused money, it is important for employees to predict as accurately as possible the amount of un-reimbursed health care expenses they will face in the year.

Most companies allow employees to place up to $2600 in a health care FSA account each year, although the IRS allows up to 25% of income to be placed into pretax plans.

Dependent Care FSAs

A dependent care FSA basically works the same way as a health care FSA, however, there are special requirements for this account. According to IRS rules, the maximum an employee can deposit is $5000. To use this FSA, the employee must be at work during the time its eligible dependents are receiving care. Eligible dependents include: children under age 13 who are exemptions on the employee's tax return and adult dependents who spend at least 8 hr in the employee's home each day and are unable to care for themselves because of a disability.

The expenses that can be reimbursed through a dependent care FSA are:

* care services for dependents inside the home if done by someone other than a spouse or children under 19;

* services to care for dependents outside the home in a center that complies with all state and local regulations;

* services by a housekeeper whose duties include providing care for a qualified dependent.

Employees should consider whether they claim a child care tax credit on their personal income tax return or with a FSA. Generally, if an employee's household earnings are greater than $25,000 annually, he will benefit more from an FSA than a year-end tax credit.

FSA Implementation

I have managed benefits for three companies over the last 15 years and have installed FSA plans at each. Initially, employees are apprehensive to use FSAs due to the "use it or lose it" rule. But, after a few years, FSAs become an appreciated and heavily used benefit. The key to gaining acceptance is to clearly communicate their downside and teach your employees how to match their FSA account funding to their planned expenses.

In each FSA implementation, I have used an outside administrator to provide summary plan descriptions, file 5500 forms, perform initial employee communications and provide all claims administration. The ongoing cost of FSA administrative services per eligible participant is about $3.50/month. Also, a start-up fee for materials of less than $5000 should be expected. For the most part, these costs will be minimized by the company's reduction in FICA payments and by the return of unused employee FSA contributions.

The savings FSAs offer is significant. This is particularly true for highly compensated employees. The other benefit is FSAs' requirement that employees understand their medical and dental benefits and the services they don't pay. This forces employees to be better consumers of medical, dental and day care services. Last, once FSAs are installed, employees will look for additional benefit plan options. The FSA is the first step in the implementation of a full cafeteria benefits plan.