Offering a Flexible Spending Account (FSA) is one of the easiest ways for a small business to provide a valuable, tax-advantaged benefit to employees. Fortunately, setting up an FSA is often much simpler than employers expect.
Whether you have five employees or fifty, this guide walks through the basic steps of establishing a Healthcare Flexible Spending Account.
Step 1: Decide Whether an FSA Is Right for Your Business
A Healthcare Flexible Spending Account allows employees to set aside pre-tax payroll deductions to pay for eligible medical expenses.
Employees can generally use their FSA to pay for expenses such as:
- Doctor visits
- Prescription medications
- Dental care
- Vision care
- Copayments
- Deductibles
- Coinsurance
- Thousands of other IRS-qualified medical expenses
Because employee contributions are made through pre-tax payroll deductions, both employees and employers can realize tax savings.
FSAs are popular with businesses because they are relatively inexpensive to offer and provide a meaningful employee benefit.
Step 2: Choose an FSA Administrator
Although employers may legally administer an FSA themselves, most choose to work with a third-party administrator (TPA).
An experienced administrator typically provides:
- Plan documents
- Claims processing
- Employee support
- FSA debit cards
- Compliance assistance
- Reporting
- Online employee accounts
Working with a TPA allows the employer to focus on running the business instead of administering the plan.
Step 3: Decide Which FSA Features You Want
Before your plan is established, you’ll make several design decisions.
Common choices include:
Healthcare FSA
The traditional medical Flexible Spending Account used for qualified healthcare expenses.
Limited Purpose FSA
Designed primarily for employees who contribute to a Health Savings Account (HSA). These accounts generally reimburse eligible dental and vision expenses while preserving HSA eligibility.
Dependent Care FSA
Allows employees to pay eligible dependent care expenses with pre-tax payroll deductions.
Many employers choose to offer more than one type of FSA.
Step 4: Establish Your Plan Documents
An FSA is a formal employee benefit plan.
Your plan will need legal documents that describe:
- Who is eligible
- When employees may enroll
- Contribution rules
- Eligible expenses
- Claims procedures
- Plan year dates
- Carryover or grace period provisions, if applicable
Most third-party administrators prepare these documents as part of the implementation process.
Step 5: Set Your Plan Year
Many employers use a January 1 plan year.
However, an FSA can generally begin at almost any time during the year.
When selecting a plan year, consider:
- Your payroll schedule
- Health insurance renewal date
- Open enrollment timing
- Administrative convenience
Many small employers align their FSA with their health insurance plan year, but this is not required.
Step 6: Enroll Your Employees
Employees elect how much they wish to contribute for the upcoming plan year, subject to the annual IRS contribution limit.
Enrollment usually involves:
- Completing an election form or online enrollment
- Selecting an annual contribution amount
- Beginning payroll deductions
Once elections become effective, employees generally cannot change them during the plan year unless they experience a qualifying life event or another permitted election change.
Step 7: Begin Payroll Deductions
After enrollment, your payroll system begins withholding the employee’s elected contribution amount on a pre-tax basis.
Your payroll provider or payroll software can usually accommodate FSA payroll deductions with minimal setup.
Many FSA administrators work directly with employers and payroll providers to ensure deductions are established correctly.
Step 8: Employees Begin Using Their Benefits
Once the plan becomes effective, employees may access their available FSA funds.
Depending on your administrator, employees may:
- Use an FSA debit card
- Submit reimbursement requests online
- Upload receipts through a mobile app
- Receive reimbursement by direct deposit
Step 9: Administer the Plan Throughout the Year
After implementation, ongoing administration typically includes:
- Processing new hires
- Handling qualifying life event changes
- Monitoring payroll deductions
- Answering employee questions
- Processing claims
- Maintaining compliance
Most of these responsibilities are handled by the FSA administrator, allowing the employer to focus on employee communication and payroll.
How Long Does It Take to Set Up an FSA?
For many small employers, an FSA can be established in just a few weeks.
The timeline depends on factors such as:
- Completion of plan documents
- Employee enrollment
- Payroll setup
- Distribution of debit cards
- Plan effective date
Starting the process before your desired effective date helps ensure a smooth implementation.
What Does It Cost to Set Up an FSA?
The cost of FSA administration varies depending on:
- Number of participating employees
- Plan design
- Administrative services
- Whether additional benefit programs are included
Many employers are surprised to learn that offering an FSA is more affordable than they expected.
In addition to providing employees with a valuable benefit, employers may also realize payroll tax savings that help offset administrative costs.
For more information, see How Much Does FSA Administration Cost?
Can I Set Up an FSA Without an Insurance Broker?
Yes.
While many employers establish an FSA through their insurance broker, it is not required.
A qualified third-party administrator can often help employers:
- Determine whether an FSA is appropriate
- Prepare the necessary plan documents
- Coordinate implementation
- Work with payroll providers
- Assist with employee enrollment
- Administer the plan after implementation
This makes it possible for even very small businesses to establish an FSA without extensive benefits experience.
Empower specializes in helping small employers implement and administer Flexible Spending Accounts.
We provide:
- FSA plan setup
- Required plan documents
- Employee enrollment support
- Claims administration
- FSA debit cards
- Employer reporting
- Ongoing customer support
Whether you’re offering employee benefits for the first time or replacing an existing administrator, we make the process straightforward from start to finish.
Ready to Set Up an FSA?
If you’re considering offering a Flexible Spending Account to your employees, we’d be happy to walk you through the process.
Contact Empower to discuss your business, answer your questions, and learn how easy it can be to implement an FSA for your employees.
