Other Employee Benefits - Flexible Spending Accounts (FSA)

FSAs are a type of cafeteria plan allowing employees to select cash and specified benefits by means of a payroll deduction that they elect each year. Such an arrangement enables the employer to expand benefit choices on a tax-advantaged basis to employees with minimal extra out-of-pocket costs.

As with a traditional cafeteria plan, an FSA offers a cash or benefits option; funding is through payroll deduction, hence there would be some reduction in employment tax (FICA, FUTA, SUTA) that the employee and employer pay. Some non taxable benefits in this sort of arrangement might not be otherwise available to employees, to wit: dependent care, dental, etc.). Finally, where the employee share of health insurance costs have increased (deductibles, coinsurance, increased contributions), a flexible spending account helps to reduce the employee's expense by converting after-tax employee expenditures to pre-tax expenditures.

FSAs must comply with the often times complicated nondiscrimination rules applicable to cafeteria plans; employees have to monitor their family benefit situations and file election forms annually on a timely basis; adverse selection could be an unexpected by-product of this type of arrangement with the unintended result of increased benefit costs; administrative costs tend to be higher, making such plans applicable for large employers; risk of forfeiture: the employee must use all contributed amounts in a given year or such benefits will be forfeited.

Tax Implications

  • Salary reduction amounts applied to nontaxable benefits are exempt from income and payroll tax;
  • The employer is entitled to a deduction for amounts that it pays;
  • Employee salary reductions lessen employer's payroll subject to payroll tax as FICA, FUTA, state unemployment taxes and workers compensation are not paid.
Fringe Benefits

You May Also Like

Related Articles
  1. Professionals

    Worried About Stocks? Try on Convertibles

  2. Entrepreneurship

    Fed Raising Rates Affects Startup Funding

  3. Professionals

    Risks to Consider When Investing in ...

  4. Personal Finance

    Why Cash Could Be Your Best Bet

  5. Options & Futures

    Options Strategies That Profit From ...

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!