For years, Flexible Spending Accounts (FSAs), also known as 125 plans or cafeteria plans, have been a popular employee benefit because they allow employees to set aside tax-free dollars for medical expenses they expect to incur during the year. Not only do employees avoid paying federal and, in most cases, state income taxes on these funds, they also save on their FICA taxes, which total another 7.65% of their income.
In the past, employers decided how much money employees could contribute to their FSAs; there was no statutory maximum. However, the Affordable Care Act changed that: as of January 1, 2013, employee contributions to a Flexible Spending Account are limited to $2,500 per year, indexed for inflation. In 2016, the cap is $2,550.

What some people don’t realize, though, is that employers can also contribute funds to their employees’ FSAs. This can be a great strategy for companies that offer a dual option to employees. For example:

In the above example, the total employer contribution would be the same regardless of which option the employees select, and the contribution to an employee’s FSA might actually be more desirable for the employer than an HSA contribution since the company would retain any unused FSA funds at the end of the plan year (assuming no rollover is offered).

For companies that would like to contribute to their employees’ Flexible Spending Accounts, though, there are some rules which are outlined in IRS Notice 2013-54 and embedded in the tax code:

“a health FSA may be considered to provide only excepted benefits if other group health plan coverage not limited to excepted benefits is made available for the year to employees by the employer, but only if the arrangement is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the arrangement for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election).

What, exactly, does this mean? Basically, an FSA, just like a health reimbursement arrangement or an employer payment plan, is considered to be a group health plan subject to the market rules applicable to group health plans (including the annual dollar limit prohibition and the preventive services requirement). However, FSAs that are treated as “excepted benefits” are exempt from these rules. Without getting too detailed, FSAs should definitely be structured to be excepted benefits to stay in compliance, so here are the rules in plain English:

1. First, the employer must offer group health coverage to the employees separate from the FSA. An employer cannot offer a Flexible Spending Account if there is no underlying group health plan.

2. The total amount available to each employee (the employer and employee contributions together) cannot exceed two times the employee’s salary reduction. Essentially, this means the employer could offer a matching benefit. If the employee puts in the maximum of $2,550, for example, the employer could contribute an equal amount because the total amount available would be twice the employee’s salary reduction. Alternatively, if the employee only contributes $1,000 to her FSA, the employer could contribute no more than $1,000. If the employer contributed $2,000, for instance, then the total amount available—$3,000 in this example—would be more than twice the employee’s salary reduction.

3. If greater, the total amount available to the employee cannot exceed the employee’s salary reduction plus $500. This would come into play if the employee contributes $500 or less to the FSA. For instance, if the employee contributes $0, twice the salary reduction amount would still be $0. However, the salary reduction plus $500 would total $500.

4. Long story short, if the employee contributes between $0 and $500 to his her FSA, the employer can contribute up to $500. If the employee contributes more than $500, the employer could match the employee contribution. Any additional employer contribution would cause the FSA to be defined as a group health plan that does not consist solely of excepted benefits and would be out of compliance.

If you’d like to learn more about how you can contribute to your employees’ Flexible Spending Accounts, contact NueSynergy today. We’ll be happy to help.

The Adoption Assistance Flexible Spending Account helps you pay for eligible adoption expenses by contributing to the account with pre-tax money from your paycheck. This means you do not pay federal or state income taxes (where applicable) on these funds. You will still have to pay Social Security taxes.

Your contribution limit is $13,460 for the 2016 tax year for each adoption. An adoption can be domestic (in the U.S.) or foreign (in another country).

Eligible Expenses
Adoption agency fees
Children under age 18
Person who is physically or mentally incapable of self-care
Special needs child
Court costs
Attorney fees
Travel expenses, including meals and lodging, while away from home
Home study and application fees
Agency fees
Medical services and counseling
Note: You must also report these expenses as part of your income tax filing.

Ineligible Expenses
Surrogate parent fees
Fees to adopt a stepchild
Fees for legal guardianship
Fees that have been reimbursed from any other source*
Fees or expenses that violate state or federal law
Getting reimbursed
NueSynergy allows for multiple methods of reimbursement. You can submit claims online through www.NueSynergy.com, through your NueSynergy mobile app, or manually by mail, fax, or email. Be sure to include a copy of the adoption agency bill or detailed court document with each reimbursement request.

Frequently Asked Questions
What is a Special Needs Child?

A special needs child must be a U.S. citizen or resident and must be certified by the state of his or her residence to meet its definition of a special needs child.

How does the Adoption Assistance FSA impact my right to take the adoption expense tax credit on my tax return?

You may be able to take both but we advise you to speak with your own tax advisor directly about this before making a final tax determination.

If I elect the Adoption Assistance FSA now, are any of my expenses from prior years eligible for reimbursement?

No. You can only claim expenses that you have in the year that you have the FSA.

What happens if I enroll in an Adoption Assistance FSA and the adoption falls through?

If the adoption was cancelled, you can stop your election. This means that you can stop any more payroll contributions into the FSA. You can’t get a refund of any money left in your FSA. You would forfeit that money because of the FSA “use-it-or-lose-it” rule.

What happens if I overestimate my adoption expenses and have money left in my FSA at the end of the plan year?

The FSA “use-it-or-lose-it” rule applies. This means that you would forfeit any money left in your FSA.

Is there an income limit for the Adoption Assistance FSA?

Yes. It’s based on your modified adjusted gross income (MAGI). For 2016, if your MAGI was more than $201,920 then you will not be able to contribute the full $13,460 to the FSA. If your MAGI was more than $241,920, then you can’t use the FSA.

When will I have access to my Adoption Assistance FSA funds to reimburse claims?

The only funds available to reimburse adoption claims are funds that already have been withheld from your pay based on your adoption assistance benefit election and that have not already been used to reimburse adoption expenses. If you were to submit a claim for more than the amount then credited to your adoption account, you immediately would receive your adoption assistance account balance and then, as additional money was withheld from you pay for adoption benefits and sent to NueSynergy, it would be sent right back to you as additional benefit payments until the claim was fully paid.

Questions?
Call Customer Service at 855.890.7239 or email at customerservice@nuesynergy.com

Note: We urge you to talk to your tax advisor. He or she can help you understand your eligibility for the FSA and the tax credit. You can read the instructions for IRS Form 8839. This form is for Qualified Adoption Expenses. You can also read Publication 15-B. Go to www.irs.gov.