A flexible benefit plan is a tax advantaged insurance coverage that allows employees to select from a pool of choices. Potential choices include cash, retirement plan contributions, vacation days, and insurance.
It represents a way to help employees gain access to individual insurance products that they might not otherwise be able to afford. Many employees do not have access to individual insurance products outside the workplace as most insurance agents selling to the general public focus on high income/net worth individuals. Flex benefits offers both convenience and value above what an employee could purchase on their own in the retail market. By offering these plans and educating employees on the benefits employers can create tremendous goodwill with their employees.
A Flexible Benefit Plan can consists of any of the three following components:
- Flexible Spending Account
- Medical Savings Account
- Health Reimbursement Arrangement
Flexible Spending Accounts, An FSA or Flexible Spending Plan allocates employee contributions to a flexible spending account. These allocations can be used towards payment of family health and insurance premiums, as well as out-of-pocket medical, dental, vision care and child care expenses. These allocations are tax deductible to the employee and will generally produce a tax savings.
The maximum contribution amount for each year is $2000 for individual and $5000 for a dependent care account. The minimum contribution each year must be at least $300.
A flexible spending plan does not come without risks to both the employee and the employer. The most common risk is that because employers typically pre-fund an FSA account, the employee can overspend their contribution dollars and then leave the company. The employer cannot collect the shortage from the lost employee.
An additional risk to the employee is that he or she underspends the account. Changes in government regulations now allow employees to carry over any balances until March 15th of the subsequent year. This helps an employee utilize their contributions without losing the balance.
Health Savings Accounts are accounts that accumulate interest as tax-deferred accounts similar to an IRA. These savings accounts can be used to pay for unreimbursed health care expenses.are savings accounts used to pay for unreimbursed health care expenses. Authorized by Title III of the Health Insurance Portability and Accountability Act of 1996, medical savings accounts became available starting on January 1, 1997. Although in the past, these accounts were available only to individuals or employers who employed 50 or fewer employees, they now allow anyone to have coverage under this plan.
These are by far the most popular with employees and employers alike and we are seeing very large companies switching employees over to an HSA plan.
Health Reimbursement Arrangements, also known as "health reimbursement accounts" or "personal care accounts," are a type of health insurance plan that reimburses employees for qualified medical expenses. .
Health reimbursement accounts consist of funds set aside by employers to reimburse employees for qualified medical expenses, just as an insurance plan will reimburse covered individuals for the cost of services incurred.
Employers qualify for preferential tax treatment of funds placed in a health reimbursement account in the same way that they qualify for tax advantages by funding an insurance plan. As in a conventional insurance plan, employers can now deduct the cost of an HRA as a business expense.
Health reimbursement arrangements are open to employees of companies of all sizes, unlike the old medical savings accounts that were only available for small business employees. A health reimbursement account provides "first-dollar" medical coverage until funds are exhausted. For example, if an employee has a $500 qualifying medical expense, then the full amount will be covered by the health reimbursement arrangement if the funds are available in the account. Under a health reimbursement account, the employer provides funds, not the employee. All unused funds are rolled over at the end of the year. Former employees, including retirees, can have continued access to unused reimbursement amounts. Health reimbursement accounts remain with the originating employer and do not follow an employee to new employment.