As the prices for healthcare and everyday essentials continue to rise, it’s essential that companies offer their employees supplemental benefits like a Flexible Spending Account (FSA). Employees now expect more support from their employers in paying for everyday costs like copays and medicine cabinet supplies, and employers have realized the benefit of having a healthier and thus more productive workforce. 

Flexible Spending Accounts are popular because they work with any type of health plan, provide tax advantages for both employees and employers, and can help account holders save money on medical, health, and dental expenses. However, the cost and administrational burden of offering an FSA can be seen by some benefits leaders as a deterrent. In this post, we’ll walk you through how to mitigate the common pain points of offering an FSA and how to find the right administrator for your company. 

Common FSA pain points

While there are many ways to run a company and each company can have wildly different demographic makeups, many of them face similar challenges when building their benefits packages. One of the biggest ones is deciding which benefits to offer. You want benefits that will provide the biggest positive impact in your employees’ lives while also being cost-effective and allowing you to stay within budget.

If you’ve recently decided to offer an FSA, or you’ve been offering an FSA to your employees and have experienced some challenges in benefit cost, administration, and employee participation, we can help you alleviate those pain points. First, we’ll tackle the overall structure of the FSA that some find challenging and confusing to use. 

Complicated and confusing to use

Successful administration and use of an FSA requires understanding and adhering to many IRS-imposed rules. These include:

• FSA contribution limits. For 2024, the annual contribution limit is $3,200.

• The Use-it-or-lose-it rule. The FSA funds in each account expire at the end of the plan year unless the employer decides to offer EITHER a rollover of up to $640 of unused money to the following year’s account, OR a 2 ½ month grace period in which employees can spend their existing balance.

• Eligible expenses. Using their FSA correctly hinges on employees being able to determine an eligible expense from an ineligible one. 

• How to submit an eligible expense for reimbursement.

Since there are strict rules that govern how employees can use their FSAs, offering this benefit can result in additional administrative work for the employer. There can be additional HR requests, as well as ongoing employee education events and more that are required. 

To help ease the burden of ongoing employee education, it can be helpful to ensure employees have multiple ways to access the information they need. This can include a dedicated landing page with the three most important pieces of information up front and center: annual contribution limit, what happens to remaining funds, what they can use their money for, and how to submit an expense for reimbursement. In addition, partnering with a benefit administrator like Lively, that offers employers and employees ongoing education and resources, as well as multiple access points for help, can provide additional relief to overburdened HR teams.

Staying IRS compliant

The IRS governs contributions to, and distributions from, FSAs, but there are additional IRS rules employers must follow if they want to avoid a fine or worse. One important regulation that affects how FSAs are administered is that these accounts are subject to ERISA rules (church employers excluded). That means employers must develop a written plan document and conduct annual non-discrimination testing to ensure the FSA doesn’t disproportionately benefit highly compensated employees or key employees at the company. Since most companies already have to do this testing for their other cafeteria plans, an FSA doesn’t add that burden if you are already offering other cafeteria plans. Violating ERISA rules can result in penalties imposed by the Department of Labor.

Another common violation of IRS rules as they relate to FSAs, is the employer’s failure to file a Form 5500 each year and knowing which version of the form the employer is required to fill out, as there are different forms for different sizes and benefit participant counts. Not filing this form can trigger an audit of the employer and the FSA plan, which can result in additional costs and administrative headaches. Partnering with a third party FSA administrator that helps you complete this form can help ensure you actually do it. And do it correctly.

In addition to non discrimination testing, employers must ensure they stay compliant with HIPAA rules when administering their FSA. Employers must limit access to protected health information which can be difficult as part of administering the FSA includes receiving receipts for expenses that could include sensitive health information. Not complying with HIPAA rules can result in fines.

One of the best ways to stay IRS and HIPAA compliant is to employ a third party FSA administrator. An effective administrator will have detailed reporting capabilities so you can not only complete the required non discrimination testing, but can discern other important information about FSA usage to make informed decisions. Employing a third party administrator also helps insulate the employer from running afoul of HIPAA rules as they will not be responsible for the processing of the actual receipts that could contain sensitive health information.

Meeting substantiation rules

Another challenge employers face when administering their own FSA is that employee receipts must be appropriately substantiated (i.e. vetted) prior to the expense being reimbursed through the FSA. The IRS has very clear rules about how employers can appropriately substantiate the expense their employee incurred and wants to reimburse for is eligible. These rules include: 

• An independent third party should substantiate each expense.

• Employers should not automatically approve expenses from “approved” providers. 

• Employers shouldn’t just substantiate a randomized sample of receipts, they should substantiate all of them.

• There shouldn’t be a minimum cost for substantiation. All expenses should be submitted for substantiation regardless of how small the charge.

One way to ensure that all expenses are substantiated appropriately, is to partner with a third party FSA benefit administrator.

Easy-to-use technology helps you overcome these pain points

As a benefit, the FSA comes with a lot of rules that govern how it's used and administered. And these rules often create challenges and pain points for the employers that offer them. But a well-developed FSA platform can make compliance, employee onboarding, and plan administration easy for employers.

Here are the features to look for in a platform:

• An insightful dashboard. Your HR team should be able to see all of your important plan information at a glance. That means contribution levels, plan usage and more.

• In-depth reporting. The reports your platform offers should provide actionable insights so you can make informed decisions.

• Easy access to plan information for employees. The platform should offer employees a clear way to see all of the important information related to their FSA, including contributions, distributions, how to submit receipts, pending reimbursements, and more.

• A mobile app. Most employees want to connect with their plan on-the-go.

• Easy receipt submission. By giving your employees a low-friction way to submit their receipts will increase employee engagement with the FSA and ease some of the administrative burden for your HR team.

• Compliance information. Your FSA administrator should ensure you’re up-to-date on any IRS, ERISA or HIPAA changes and make it easy for you to complete and file your Form 5500.

Multiple access points for help. People access help in different ways so you want an administrator that gives employers and HR teams multiple options including in-app help, chat, email, and phone support.

How to choose the right FSA solution for your business

The right FSA solution for your business will be the plan that eases the administrative burden for your HR team, helps your company stay compliant with IRS, ERISA and HIPAA rules, helps employees get the most from their plan, and does it in a cost-effective way.

You want to look for modern technology, help that’s easily accessible, help with employee onboarding and ongoing education, and transparent pricing.

Why choose Lively?

Lively’s FSA has been expressly designed to be intuitive to even the least technologically savvy. HR teams have easy access to an informative dashboard that gives a 360 degree view of their FSA plan at a glance. They can run a wide range of reports and have access to concierge level support and education classes for account holders as well as training for HR staff. Lively’s support team is available via phone, text, email and chat. In addition, Lively’s platform automatically updates HR teams to changes in IRS, ERISA and HIPAA regulations they need to be aware of and provides information for Form 5500 filing upon request. 

From the employees’ perspective, Lively’s FSA platform makes managing their account easy, thus reducing the need to interact with HR staff. From mobile or desktop, they can see their plan deposits and usage quickly, submit receipts, check up on any pending reimbursements and check expense eligibility. This helps them to get the most out of their FSA plan, which helps the FSA to be a more impactful benefit for the employer to offer. 

If you’re ready to offer an FSA that’s easy for both your benefits team and employees to use and takes the pain out of FSA administration, reach out to Lively today.