Yes.
A business owned by a husband and wife can generally establish and sponsor a Flexible Spending Account (FSA) for its employees.
However, whether the owners themselves can participate depends on how the business is organized. In many cases, the owners are not eligible to receive the tax advantages of an FSA, even though the business can still offer this valuable benefit to eligible employees.
Understanding the distinction can help small business owners make informed decisions about their employee benefits.
Can the Business Sponsor an FSA?
Yes.
A husband-and-wife business may establish a Section 125 Cafeteria Plan and offer a Healthcare Flexible Spending Account to eligible employees.
Offering an FSA can provide several advantages, including:
- A valuable employee benefit
- Payroll tax savings on employee pre-tax contributions
- Improved employee recruitment and retention
- A relatively low-cost way to enhance a benefits package
For businesses with employees, an FSA is often one of the easiest benefits to implement.
Can the Owners Participate?
That depends on the legal structure of the business.
For many small businesses, the owners cannot participate in the FSA on a tax-favored basis.
For example, more-than-2% shareholders of an S corporation generally are not eligible to participate in a Section 125 Cafeteria Plan. Sole proprietors and partners in a partnership are also generally not eligible.
If the business is taxed differently, different rules may apply.
Because owner eligibility depends on the business structure, employers should consult their tax advisor or benefits professional when determining whether the owners may participate.
What About the Employees?
Even if the owners are not eligible, eligible employees often are.
That means a husband-and-wife business can still provide an FSA to employees, allowing them to pay qualified medical expenses with pre-tax dollars.
Employees may generally use FSA funds for eligible expenses such as:
- Doctor visits
- Prescription medications
- Dental care
- Vision care
- Copayments
- Deductibles
- Coinsurance
- Other IRS-qualified medical expenses
For many small businesses, offering an FSA is an affordable way to improve employee benefits without offering more expensive healthcare programs.
Why Offer an FSA If the Owners Can’t Participate?
This is a common question.
Although the owners may not personally benefit from the FSA, offering one can still provide meaningful advantages to the business.
An FSA may help:
- Attract and retain quality employees.
- Reduce payroll taxes on employee salary reductions.
- Enhance the company’s overall benefits package.
- Demonstrate a commitment to employee well-being.
For employers with several employees, these advantages often outweigh the fact that the owners themselves cannot participate.
Is an FSA Difficult to Administer?
Not at all.
Most employers work with a third-party administrator that handles:
- Required plan documents
- Employee enrollment
- Claims administration
- FSA debit cards
- Employer reporting
- Customer support
This allows even very small businesses to offer an FSA without creating a significant administrative burden.
How Empower Helps Small Businesses
Empower works with businesses of all sizes to establish and administer Flexible Spending Accounts.
We help employers:
- Prepare plan documents.
- Implement new FSA plans.
- Support employee enrollment.
- Process claims.
- Provide FSA debit cards.
- Maintain ongoing plan administration.
Whether your business has two employees or two hundred, we can help you determine whether an FSA is the right fit.
Questions About Offering an FSA?
If you own a husband-and-wife business and are considering offering an FSA, it’s important to distinguish between what the business can offer and who is eligible to participate.
Even if the owners cannot receive the tax advantages of an FSA, the plan may still be an excellent benefit for your employees.
Contact Empower to learn more about establishing a Flexible Spending Account for your business.
