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Entities that
qualify
The following entities can
save money on taxes by establishing an FSA plan: Regular
Corporations, Partnerships, S Corporations, Limited Liability
Companies (LLCs), Sole Proprietorships, Professional Corporations,
and Not-For-Profits.
What about owners?
While regulations prohibit a
sole proprietor, partner, members of an LLC (in most cases), or
individuals owning more than 2% of an S corporation from
participating in the FSA plan, they may still sponsor a plan and
benefit from the savings on payroll taxes. "Employee"
shareholders of regular corporations may also participate.
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Important Information |
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The plan must be in writing and a Summary Plan Description must
be distributed to each plan participant. |
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Elections must be made prior to the beginning of the plan year and
cannot be changed or revoked at any time during the plan
year unless the participant has a
change of status, or the required contributions to pay
premiums for the elected benefits change during the plan year. |
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COBRA continuation forms should be provided to all terminating
participants in the medical reimbursement portion of the
plan. However, COBRA need not be offered for subsequent
plan years. |
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If disability insurance is paid on a pre-tax basis,
benefits received from the insurance carrier by the
employee may be taxable. Under most circumstances, it is
recommended that disability insurance not be included in
the plan. |
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No more than $50,000 of employer-sponsored group-term life insurance
may be provided to employees on a pre-tax basis. |
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Insurance products with a return-of-premium feature cannot be paid
for on a pre-tax basis. |
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The plan may not discriminate in favor of highly compensated or key
employees. |
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The plan must provide a written statement by January 31 of every
calendar year showing the amounts paid or expenses
incurred for daycare expenses during the previous
calendar year. This amount is shown on the employee’s
W-2. |
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Generally, employers maintaining Health FSA plans that cover more than
100 eligible employees must file an IRS Form 5500
each year. |
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For a medical FSA, the employer must make the full election
amount available to participants on the first day of the
plan. If an employee leaves employment before fully
funding the plan, the company must complete funding. In
case of a deficit in the plan account, the company must
fund this deficit until employee deposits cover the
balance. Generally, the employer’s FICA savings
outweigh this risk. |
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Eligible expenses must be incurred during the plan year. Funds
elected by participants, but unused at the end of the
year, will be forfeited to the plan. |
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Because employees do not pay any social security tax on income
redirected to the plan, their social security benefits
may be slightly reduced. |
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