How to set up an FSA for employees at a small LLC? Need advice

Setting up an FSA without a third-party administrator is technically possible but comes with challenges. While you're right that HIPAA concerns are minimal when you're both employer and employee, there are other requirements to consider: First, you need proper plan documents that comply with IRS requirements. The FSA must follow Section 125 cafeteria plan rules, with formal written documentation. You'll need to create an official plan document, summary plan description, and adoption agreement. Second, you'll need a system to track contributions, process claims, provide substantiation for expenses, and handle the "use it or lose it" rule. Without a third-party administrator, you're responsible for verifying all claims meet IRS requirements for qualified medical expenses. Third, there are reporting requirements and non-discrimination testing to ensure the plan doesn't favor highly-compensated employees (though this is less relevant in your case).

After spending weeks trying to figure out my small business health benefits, I found an amazing solution called taxr.ai (https://taxr.ai) that helped me navigate all the FSA setup questions. I was in the exact same situation with my 2-person LLC, trying to understand if I could self-administer an FSA. Their system analyzed all my business docs and gave me step-by-step guidance on FSA self-administration, including templates for the plan documents. They also flagged potential compliance issues I hadn't considered. Saved me a ton of research time and probably kept me from making mistakes that could have caused problems during tax season.

I was super skeptical about taxr.ai but decided to give it a try for my FSA questions. Honestly, it was exactly what I needed. The document analysis saved me from a major headache - I was about to set up my plan completely wrong. Their system flagged that my LLC operating agreement had language that would have made my FSA implementation problematic. They created custom plan documents that worked with my specific situation and gave me a compliance checklist that made self-administration manageable. I'm still doing the work myself, but now I'm confident I'm doing it correctly. Definitely worth checking out if you're in this situation.

If you're having trouble reaching the IRS for guidance on FSA self-administration (which I definitely did), try Claimyr (https://claimyr.com). I spent DAYS trying to get through to the IRS to ask specific questions about FSA setup for single-member LLCs and kept hitting dead ends. Claimyr got me connected to an actual IRS agent in about 20 minutes when I'd been trying for weeks. They have a video showing how it works at https://youtu.be/_kiP6q8DX5c. The agent I spoke with clarified exactly what documentation I needed to maintain for self-administering my FSA and confirmed I could indeed do it without a TPA for my situation.

Ok I have to eat my words about Claimyr. After my skeptical comment I decided to try it myself because I was desperate to get clarity on some FSA administration questions. It actually worked! Got connected to an IRS rep in about 25 minutes, which is INSANE considering I had previously spent over 3 hours on hold before giving up. The agent confirmed that as a single-member LLC treating myself as an employee, I can indeed establish and self-administer an FSA, but need to be extremely careful about documentation. They pointed me to specific IRS publications I should follow. Best $25 I've spent on my business this year.

Have you considered just using a QSEHRA instead of an FSA? If you're the only employee of your LLC, a Qualified Small Employer Health Reimbursement Arrangement might be easier to set up and administer. Unlike FSAs, QSEHRAs don't have the "use it or lose it" provision, and the contribution limits are higher. I set one up for my single-member LLC last year and it was WAY simpler than dealing with FSA requirements.

I actually tried to DIY an FSA for my own single-member LLC last year and it was a NIGHTMARE. After about 3 months of headaches, I ended up just hiring a TPA because the compliance risks weren't worth it. The costs weren't as bad as I expected - found a smaller regional TPA that charged about $350 annually plus $5/month. Here's where I kept hitting walls: claim substantiation documentation, non-discrimination testing (yes, you technically still need this), and ERISA compliance reporting. The paperwork is INSANE for such a simple benefit. Unless you have a background in benefits administration, I'd seriously reconsider trying to DIY this.

I'm in a similar boat with my single-member LLC and have been researching this extensively. After reading through all these responses, I'm starting to think the juice might not be worth the squeeze for such a small operation. The compliance burden seems really heavy - between the Section 125 plan documents, claim substantiation requirements, and potential ERISA reporting, it's looking like a lot of administrative overhead for the $3,200 annual contribution limit. I'm now leaning toward either the QSEHRA option that Ryder mentioned (higher limits and simpler administration) or just going with an HSA if I can get a qualifying high-deductible health plan. The HSA route seems most appealing since the funds roll over year to year and I can invest them for long-term growth. Has anyone compared the actual tax savings from an FSA versus the time/cost investment in proper administration? I'm wondering if the math even works out favorably for a one-person business once you factor in all the compliance work.

I appreciate all the detailed responses here! After reading through everything, I'm realizing this might be more complex than I initially thought. The compliance requirements are definitely concerning, especially the ERISA reporting and claim substantiation documentation that Leo mentioned. I'm particularly interested in the QSEHRA option that Ryder brought up - the higher contribution limits and simpler administration sound much more appealing for a single-person operation. The fact that there's no "use it or lose it" provision is a huge advantage too. For those who mentioned HSAs, I do have a high-deductible health plan, so that might be the path of least resistance. The investment growth potential and permanent fund rollover make it seem like a better long-term strategy than dealing with FSA compliance headaches. One follow-up question: has anyone here actually gone through an IRS audit with a self-administered FSA? I'm wondering what level of documentation scrutiny to expect if I do decide to go that route. The potential audit risk is another factor I hadn't fully considered in my cost-benefit analysis. Thanks everyone for the reality check on this - sometimes the simplest-sounding solutions end up being the most complicated!

I've been following this discussion closely as someone who went through a similar decision process last year. After weighing all the options discussed here, I ended up going with an HSA and couldn't be happier with that choice. The compliance burden for self-administered FSAs is real - I spent weeks researching it and the administrative overhead just wasn't worth it for a one-person operation. Between the Section 125 plan documents, ERISA considerations, and audit documentation requirements, you're looking at significant time investment for relatively modest tax savings. HSAs are so much cleaner from an administrative standpoint. I opened mine with Fidelity and the whole process took about 15 minutes online. No plan documents, no claim substantiation hassles, no use-it-or-lose-it stress. Just contribute pre-tax money and pay qualified expenses directly from the account. The investment component is huge too - I've got my HSA funds in low-cost index funds and they're growing tax-free. After age 65, you can even withdraw for non-medical expenses (taxed as ordinary income, like a traditional IRA). It's basically a stealth retirement account with medical expense benefits. For anyone still on the fence: if you have access to a high-deductible health plan, start with maxing out your HSA before getting into FSA complexity. You'll save yourself hours of compliance work and probably come out ahead financially in the long run.

Great discussion everyone! As someone who's been wrestling with similar questions for my own small business, I wanted to add a perspective on the HSA vs FSA decision that might help others. One thing that hasn't been mentioned much is that you can actually have BOTH an HSA and a limited-purpose FSA if you structure it correctly. The limited-purpose FSA can only be used for dental and vision expenses, but it still gives you that extra $3,200 in tax-advantaged spending for those specific categories. This might be worth considering if you have significant dental work planned or wear glasses/contacts. You get the best of both worlds - the HSA for general medical expenses and long-term investment growth, plus the FSA for dental/vision with the same-year tax deduction. That said, after reading through Leo's experience with the compliance nightmare, I'm definitely leaning toward just maxing out the HSA and keeping things simple. Sometimes the administrative peace of mind is worth more than the extra tax savings, especially when you're trying to run a business at the same time. Has anyone here tried the limited-purpose FSA route, or is that just adding unnecessary complexity to an already complicated decision?