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By now, I would assume everyone is aware we are living in tough economic times. It's quite a challenge right now to keep a business going. Without question, your employees are feeling the pinch as well, but there are many ways in which companies can assist their employees with these burdens. One of the most practical ways is to start a Flexible Spending Account.

A Flexible Spending Account, or FSA, is a benefit provided by an employer that allows workers to deposit a certain amount of their paycheck into a special account -- before taxes. Then, during the year, you can use the funds in the account to pay for qualified expenses with the untaxed dollars.

With this plan, the average person can experience savings of $25 to $40 on every $100 spent. Why? Because you don't pay taxes on the money you set aside each period for your flex account.

A concern that some people have is a common belief that an FSA is strictly for medical co-pays. But, an FSA can also include emergency room costs, surgical co-pays, over-the-counter drugs, prescriptions, dental expenses and eye care.

Using Your FSA Account

Not only does an FSA include the previously mentioned services, it's a very simple system to use. Usually, account holders are issued a Visa or MasterCard Flexible Spending Account card. This keeps you from having to reach into your pocket whenever expenses arise, and you don't have to submit receipts for reimbursement. Instead, your purchase is deducted from the balance in your account. If you do encounter a place that doesn't have a credit card machine, like my doctor for instance, you can still pay the co-pay and submit the claim for reimbursement. The payment is usually sent out within two weeks.

The money is distributed through regular payroll deductions, the same as with direct deposits. You should explain to the employee he or she will, in most cases, NOT see a reduction in pay. Why? For every dollar you set aside to pay qualified expenses, you save FICA, federal income taxes and (where applicable) state withholding. Your net take-home pay will increase by the taxes you save. Plus, when you pay a qualified expense or receive a cash reimbursement -- it's tax free!

There are two ways to keep track of the balance in your FSA: online or over the phone. Another great feature is that you don't need to contribute all your money before you can start using your FSA. For example, you decide on Jan. 1 to contribute $2,000 for the calendar year. Then, your child has an orthodontist's appointment on Jan. 6, you can use all of your $2,000 worth of benefits on that one appointment even though you have not yet deposited that much in your FSA.

I Already Have Health Insurance

Why would you need this program if you already have health insurance? This plan covers expenses not covered by your health insurance plan. We all know co-payments, over-the-counter medications, eyeglasses and such can add up quickly. Why not buy these things with your pretax dollars? For those who take a dependent care credit on their 1040, using the FSA translates into saving more for earning more. Besides that, you'll also save on social security tax (FICA) with a dependent care account. Why wait until April 15 to take a credit? This way you can save on taxes with every paycheck.

There are other things that should be made clear with the program and kept in mind when deciding on whether or not to use the program. Any money contributed that is not used is lost, so careful planning is needed. Also, because you may not pay social security tax on the amount of gross pay you set aside, your social security benefits at retirement may be slightly reduced. As well, you can change your contributions during the year for certain situations. It can be changed if you have a change in status, a change in your employment or a change in the employment of a spouse or dependent.

Getting Set Up

There are also some things you should consider as the administrator of such plans. First, there is some minimal cost to setting up the program. On the plus side, if you reach certain quotas as far as how many employees you have in the program, you are eligible, as a company, for some tax benefits. Most importantly, programs you set up for your employees are only successful if you take an active role in explaining to the employees the details of the program. After you write out the policy, be prepared to answer questions your employees will have. For many, an employee's strength may not be finances and he or she may need your help in this area. As we have said many times before, when employees feel safe, wanted and free from stress, the company only becomes stronger.

None of us can foretell what the future holds in these uncertain economic times. We're all in this together. Hopefully, using tools like an FSA program will help to get us all through whatever lies ahead.

About the author:
Jon Olson is the production and operations manager for Sterling Surfaces in Sterling, Mass. He has been a solid surface fabricator since 1982 and can be reached at jon@sterlingsurfaces.com.