Flexible Spending Accounts (FSAs) can be a great way to engage employees in employer benefits while saving on taxes. To boost participation, employer flex credits are just the ticket to enhance savings for both employers and employees—plus the rules are pretty simple.
Employer credits may be available for any benefit within a flexible benefits plan such as reducing the employees’ portion of insurance premiums, for the dependent care account, or used in the healthcare FSA. This “seed” money doesn’t have to be extravagant, it could be as little as $50 per employee just to get them started in the plan. The easiest course of action for most employers is to drop the flex credits into the healthcare FSA. A great way to get all employees engaged in the flex plan.
How Can Employers Offer Flex Credits?
There are just two rules to follow in order to offer employer flex credits to healthcare FSAs. First, employees must be eligible for the employer-sponsored Affordable Care Act-compliant group health insurance coverage. If the employer has a healthcare FSA now, be sure they are following this rule. Second, employer contributions to the healthcare FSA are limited to $500 or, if more than $500, equal to the participant’s election.
Here’s an example of employer contributions to the health FSA that meet the Maximum Benefit condition:
- A one-for-one employer match. (Employer $600, employee $600.)
- An employer contribution of $500 or less. (Employer $500, employee $200.)
These scenarios do not meet the Maximum Benefit condition:
- Employer contributes more than $500, if employee contributes $500 or less. (Employee election $400 and employer contributions $600.)
- Employer contribution in excess of one-to-one match, if employee contributes more than $500. (Employer contributes $700, employee contributes $600.)
Certainly, flex credits can be offered to all employees. Those making no healthcare FSA election, or making an election up to $500, could receive $500 in employer flex credits. In addition the employer can match election amounts for employees making more than a $500 election.
If employers want to maximize the annual election that employees may take, the employer flex credits cannot be available to employees in cash—a taxable event. This means employees electing the statutory maximum limit for healthcare FSAs, $2,650 for 2018, could receive an additional $2,650 from employer flex credits for a total election of $5,300 for eligible healthcare expenses.
Another reason for not offering employer flex credits as cash? If any portion of the employer flex credits is available as cash to participants, the entire employer flex credit amount would be counted as part of all participants’ regular rate of pay for overtime purposes. This includes all participants who were offered employer flex credits whether they took cash or used the employer credits for nontaxable benefits.*
If your employers want to offer flex credits, it must be detailed in the flex plan documents and Summary Plan Descriptions (SPDs). How much and whether to offer a flat dollar amount or match elections is up to the employers and their objectives for offering flex credits.
*The Fair Labor Standards Act (FLSA) – regulated by the Department of Labor (DOL) – would likely obligate employers to include all cashable employer contributions as part of the employee’s “regular rate.”
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.