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Flexible spending accounts

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Flexible Spending Accounts (FSAs) are employer-established benefit programs that allow employees to set aside pre-tax dollars to pay for eligible healthcare and dependent care expenses. As part of a comprehensive compensation and benefits package, FSAs offer significant tax advantages for both employees and employers. For employees, contributions to an FSA are deducted from their gross income, reducing taxable income and resulting in lower federal income taxes, Social Security taxes, and, in some cases, state taxes. Funds in an FSA can be used to cover a wide range of medical expenses not covered by insurance, such as copayments, dental and vision care, prescription medications, and over-the-counter medical supplies. Dependent care FSAs similarly allow employees to pay for eligible childcare or eldercare expenses, providing financial relief for working parents and caregiversFrom an employer’s perspective, offering FSAs can enhance the overall benefits package, making the organization more attractive to potential and current employees without incurring significant costs, as FSA contributions are typically pre-tax and not subject to payroll taxes. Additionally, employers can offer a competitive edge by providing FSAs alongside other health and wellness programs, fostering a supportive work environment that values employee well-beingFSAs also play a role in strategic human resource management by aiding in employee retention and satisfaction. By allowing employees to tailor their benefits to meet individual needs, FSAs contribute to a more flexible and responsive compensation structure. However, it is important for HR professionals to manage FSAs effectively, considering factors such as the “use-it-or-lose-it” rule, which requires employees to spend the funds within the plan year or forfeit the remaining balance, although some plans offer a grace period or carryover optionIn summary, Flexible Spending Accounts are a valuable component of compensation and benefits strategies, providing tax savings and financial flexibility to employees while enhancing the employer’s benefits offerings. Proper implementation and management of FSAs can lead to increased employee satisfaction and retention, aligning with the goals of strategic human resource management.

Flexible Spending Accounts (FSAs) Guide

Introduction
Flexible Spending Accounts (FSAs) are employer-established benefit programs that allow employees to set aside pre-tax dollars to pay for eligible healthcare expenses.

Why FSAs are Important
FSAs provide significant tax savings by reducing taxable income. They also offer a way to budget for medical expenses not covered by insurance.

What is an FSA?
An FSA is a type of savings account that allows employees to allocate a portion of their earnings to pay for qualified medical expenses. The funds are deducted from the employee's paycheck before taxes, thus lowering taxable income.

How FSAs Work
Employees decide how much to contribute to their FSA during the benefits enrollment period. The total amount is available at the beginning of the plan year. Funds can be used to pay for eligible medical expenses such as copays, prescriptions, and certain over-the-counter items.

Answering Exam Questions on Flexible Spending Accounts
When tackling exam questions on FSAs, ensure you understand key concepts such as eligibility, contribution limits, pre-tax benefits, eligible expenses, and the "use-it-or-lose-it" rule.

Exam Tips: Answering Questions on Flexible Spending Accounts

  • Understand the Basics: Familiarize yourself with definitions and core principles of FSAs.
  • Know the Limits: Be aware of annual contribution limits set by the IRS.
  • Tax Implications: Understand how pre-tax contributions affect taxable income.
  • Eligible Expenses: Memorize common eligible and ineligible expenses.
  • Deadlines and Rules: Keep in mind the deadlines for using FSA funds and any grace periods.

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SHRM-CP - Compensation and Benefits Example Questions

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Question 1

Which of the following expenses is generally considered an eligible expense under a Health Flexible Spending Account (HCFSA)?

Correct Answer: Prescription medications required by a doctor.

Prescription medications required by a doctor is generally considered an eligible expense under a Health Flexible Spending Account (HCFSA) because they are necessary for medical treatment. Over-the-counter supplements and vitamins are not typically eligible unless prescribed by a doctor. Cosmetic surgery for appearance enhancement is not eligible as it is not considered medically necessary. Non-prescription contact lenses are generally not eligible unless they are prescribed and necessary for vision correction.

Question 2

Which of the following best describes the coordination of benefits when an employee is enrolled in both a Health Flexible Spending Account (FSA) and a Health Savings Account (HSA)?

Correct Answer: An employee cannot simultaneously contribute to both a Health FSA and an HSA unless the FSA is limited to specific expenses.

An employee cannot simultaneously contribute to both a Health FSA and an HSA unless the FSA is limited to specific expenses. This is because general-purpose FSAs would render the employee ineligible for an HSA. However, if the FSA is restricted to specific expenses, such as dental or vision, it does not interfere with HSA eligibility. Other options incorrectly suggest that employees can contribute to both accounts without restrictions, that FSA contributions affect HSA limits, or that funds can be used interchangeably between the two accounts for any eligible healthcare expenses.

Question 3

Under what circumstances can an employee change their Flexible Spending Account (FSA) contribution outside of the open enrollment period?

Correct Answer: A qualifying life event, such as marriage or the birth of a child.

An employee can change their Flexible Spending Account (FSA) contribution outside of the open enrollment period when they experience a qualifying life event, such as marriage or the birth of a child. These significant personal changes can impact an employee's benefits needs, allowing for adjustments to their FSA contributions. The other options, including annual performance reviews, completing a certain number of work hours, or employer-initiated benefit adjustments, do not typically provide the opportunity to change FSA contributions outside the open enrollment period.

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