Yes. A business can administer its own Flexible Spending Account (FSA) rather than hiring a third-party administrator (TPA).
However, before deciding to self-administer an FSA, employers should carefully consider the time, compliance responsibilities, and administrative work involved.
While self-administration may appear to save money, many employers discover that the ongoing responsibilities outweigh the potential cost savings.
Is It Legal to Administer Your Own FSA?
Yes.
Federal law does not require employers to hire a third-party administrator to operate a Healthcare Flexible Spending Account.
An employer may choose to administer its own plan, provided it complies with all applicable IRS regulations, maintains the required plan documents, and administers the plan according to its written terms.
Many larger organizations successfully self-administer benefit plans because they have dedicated HR, payroll, legal, and benefits staff.
For smaller employers, the decision is often more challenging.
What Does Self-Administering an FSA Involve?
Administering an FSA involves much more than reimbursing employees for medical expenses.
Typical responsibilities include:
- Preparing and maintaining plan documents
- Managing annual open enrollment
- Tracking employee elections
- Processing payroll deductions
- Reviewing reimbursement requests
- Determining whether expenses are eligible
- Maintaining participant account balances
- Communicating with employees
- Retaining required records
- Managing plan year deadlines and carryover or grace period rules
- Preparing for nondiscrimination testing, if applicable
Each of these tasks requires consistent administration throughout the year.
Reviewing Claims Takes Time
Every reimbursement request must be reviewed to determine whether the expense qualifies under IRS rules and the terms of the plan.
This often requires reviewing documentation such as:
- Explanation of Benefits (EOBs)
- Itemized receipts
- Pharmacy documentation
- Dates of service
- Proof that expenses have not been reimbursed elsewhere
When documentation is incomplete, employers must follow up with employees before approving reimbursement.
For many small businesses, claims review becomes one of the most time-consuming aspects of administering an FSA.
You’ll Be Handling Sensitive Health Information
When employees submit reimbursement requests, they often provide medical documentation containing protected health information (PHI).
Self-administering employers should be prepared to:
- Limit access to medical information.
- Store records securely.
- Protect employee privacy.
- Follow applicable HIPAA privacy and security requirements.
Many employers prefer having a third-party administrator receive and review this information rather than asking HR staff, office managers, or payroll personnel to handle employee medical documentation.
Employees Often Expect a Benefits Debit Card
Many employees appreciate the convenience of paying eligible healthcare expenses with an FSA debit card.
Most third-party administrators offer debit card programs that allow participants to access their available FSA funds at eligible merchants.
Employers that self-administer their plans may not have access to these programs or may find them difficult to implement independently.
Without a debit card, employees typically pay expenses out of pocket and submit reimbursement requests manually.
Compliance Responsibilities Continue Every Year
Once an FSA is established, the employer is responsible for administering the plan according to applicable rules.
This includes:
- Operating the plan according to its written documents.
- Following annual contribution limits.
- Applying eligibility rules consistently.
- Communicating required information to employees.
- Maintaining appropriate records.
These responsibilities continue year after year, even if only a handful of employees participate.
Is Self-Administration Worth the Savings?
For very small employers with only a few participants, self-administration may appear to reduce administrative expenses.
However, employers should also consider the value of their own time.
Questions to ask include:
- How much time will claims processing require?
- Who will answer employee questions?
- Who will determine whether expenses qualify?
- Who will maintain plan records?
- Who will keep up with changing IRS rules?
When these responsibilities are assigned to an owner or office manager, the true cost of self-administration is often higher than expected.
Why Many Small Businesses Choose a Third-Party Administrator
Many employers decide that outsourcing administration allows them to focus on running their business rather than administering employee benefits.
A third-party administrator typically provides:
- Claims processing
- Benefits debit cards
- Employee support
- Compliance assistance
- Secure handling of reimbursement documentation
- Employer reporting
- Plan administration expertise
This reduces the administrative burden while improving the employee experience.
Curious about how much a TPA costs? Read More
How Empower Helps Small Businesses
Empower works with employers of all sizes to simplify Flexible Spending Account administration.
Our services include:
- FSA plan administration
- Claims processing
- Benefits debit cards
- Employee and employer support
- Compliance assistance
- Reporting
- Ongoing plan administration
Whether you’re offering an FSA for the first time or considering moving away from self-administration, our experienced team can help make the process straightforward and efficient.
Should Your Business Self-Administer an FSA?
While employers can legally administer their own Flexible Spending Account, doing so requires an ongoing commitment of time, attention, and compliance expertise.
For many small businesses, partnering with an experienced FSA administrator allows employees to receive better service while freeing business owners and HR staff to focus on their core responsibilities.
If you’re evaluating whether to self-administer an FSA or work with a third-party administrator, contact Empower to discuss your options. We’re happy to explain the differences and help you choose the approach that best fits your organization.
