If your not-for-profit organization doesn't already offer Flexible Spending Accounts (FSAs), you might want to consider making them available to employees. FSAs have relatively low administrative costs and don't require employer contributions (though you can make them if you wish). Plus, they generally provide both employers and employees with tax savings.
Here's how it works: Your organization sets up designated FSA accounts for eligible employees. Participants typically make contributions through pretax payroll withholding. This lowers their taxable income and reduces their portion of payroll taxes. Your organization also saves on payroll taxes it would otherwise owe on those amounts.
Say, for example, that nonprofit staffer Natasha normally falls in the 24% federal tax bracket. If she contributes $5,000 to an FSA in 2024, her employer saves $1,200 (24% of $5,000) in income taxes and $382.50 in payroll taxes (7.65% of $5,000). That's a total savings of $1,582.50 — not counting potential state taxes. What's more, distributions made for Natasha's qualified medical expenses are tax-exempt.
Tax savings can add up quickly if many of an organization's employees contribute to FSAs. And, as you might imagine, FSAs can help employers recruit and retain employees who value tax-saving benefits. If you offer an FSA plan, all full-time employees are eligible to participate, from your organization's executive director down to entry-level staffers.
There are two types of FSA accounts for your nonprofit to choose from:
1. Health. Employees can use distributions throughout the year to pay qualified health care expenses for themselves, their spouses, and dependents age 26 or younger. The list of qualified expenses is extensive (generally aligning with deductible medical expenses for federal income tax purposes). The annual contribution limit is $3,200 for 2024 ($3,300 for 2025).
One important caveat: FSAs typically can't be used to pay health insurance premiums or to purchase over-the-counter drugs, vitamins, gym memberships or cosmetic surgery. Distributions paid for such items usually are taxable and subject to a 10% penalty if the person is under age 59½.
2. Dependent care. These FSAs function much like health FSAs but cover expenses related to caring for children under age 13 and dependents who are physically or mentally incapable of self-care (for example, older special-needs children or elderly relatives). However, unlike health care expenses, which typically aren't predictable, it's usually easier to estimate annual dependent care expenses. The annual contribution limit is $5,000, and it's not indexed for inflation.
Qualified dependent care expenses generally include those that allow them and their spouses to be gainfully employed. These include amounts paid to:
Participants can't use FSA funds to pay for food, clothing and entertainment; child support; educational supplies; overnight camp; or cooking and cleaning services not provided by a caregiver. And parents can't use FSA funds to pay an "allowance" to their teenagers to keep an eye on younger siblings.
Until recently, FSA participants were required to "use it or lose it" — they had to forfeit any account balance that hadn't been spent by year end. Now, however, participants may have one of two options depending on how your nonprofit administers the FSA plan:
Your plan can make either the grace period or the carryover rule available, but not both. This is true for health and dependent care FSAs.
If FSAs aren't already on your employee benefits menu, think about how they could help you attract and retain staffers and provide tax savings. And if you already offer them, consider allowing either a grace period or carryovers. Workers are more likely to take advantage of such fringe benefits if they don't have to worry about forfeiting some of their hard-earned money.
Get in touch today and find out how we can help you meet your objectives.
