Health Care Flexible Spending Accounts

With this feature, employees can contribute pretax dollars into an account that can ultimately reduce out-of-pocket costs for medical, dental, and vision expenses.

The standard transaction type for Health Care Flexible Spending Account (FSA) deductions have the pre-tax deduction code of 125FSA Reg. The transaction type will deduct from the employee's pay pre-tax for most mandatory withholding taxes, but only up to the annual IRS limits.

Click here for Plan limits

Understanding FSA Limits and Tax Treatment

FSA contribution limits are set annually by the IRS and are pre-tax. If the plan allows, the employer may also contribute to an employee's FSA.

How Health Care FSA Deductions Work

When you select 125FSA Reg from the Vertex Deduction Code dropdown, the system automatically applies the current year's contribution limit.

Processing Logic:

• Deductions are taken pre-tax and reduce taxable wages up to the annual limit
• Once the year-to-date (YTD) contributions reach the limit, any excess deductions automatically switch to post-tax
• The system will still attempt to process these excess deductions from the employee's paycheck

To prevent over-contributions: Set the annual limit manually in the employee's deduction setup. This ensures deductions stop once the limit is reached rather than switching to post-tax treatment.

Health Care Flexible Spending Account [FSA] Transaction Type Set Up

1. Open Admin Tools > Transaction Type > Detail.
2. Click Add New.
3. Select a descriptive name that easily identifies the FSA transaction type for your users.
4. Set the Type field to Permanent.
5. Set the Deduction Category to the appropriate group for GL mapping purposes.
6. The Vertex Deduction code must be 125FSA Reg. This is a critical step to ensure correct taxation.
7. Select all the branches with which this deduction should be shared.
8. Click Save. 

Validation and Testing

After setup, verify your configuration:

1. Process test payroll to confirm pre-tax treatment
2. Verify limits are properly enforced by the system
3. Test excess contributions switch to post-tax treatment correctly