Summary
A flexible choice account – also known as a flexible choice savings scheme – is a savings scheme into which the employer regularly pays a percentage of the salary on which holiday pay is calculated. The employee chooses whether the money should be used for extra pay, a pension or time off. The scheme is governed by the collective agreement, not by law, so the contribution rate and how the funds are used depend on the specific collective agreement.
Short answer
A flexible savings account – also known as a flexible savings scheme – is a savings scheme where you, as an employer, make regular contributions amounting to a percentage of the employee’s holiday-entitlement pay. The employee chooses whether the money should be used for extra pay, a pension or time off. The scheme stems from collective agreements – not from legislation – so both the contribution rate and the options available depend on the collective agreement that applies to you.
What is a flexible savings account?
A flexible choice account is an account set up and managed by the company for each individual employee. With every payslip, an agreed percentage of the holiday-eligible pay is paid into the account, and the amount accumulates over the course of the year. The scheme was introduced during the collective agreement negotiations in 2007 and has since been extended on several occasions. The balance and all payments must be shown on the employee’s payslip.
Who is entitled to a free-choice account?
The right to a flexible spending account is provided for in a collective agreement. If the employee is covered by a collective agreement, they are typically entitled to the scheme from the start of their employment, often without any length-of-service requirement. If the employee is not covered by a collective agreement, they generally have no such right – unless you have included a voluntary provision to that effect in the employment contract or a local agreement.
What can the money be used for?
It is the employee who decides how the savings are to be used – within the framework of the collective agreement. The typical options are:
- Extra pay – the amount is paid out, often in connection with holidays or days off.
- Pension – all or part of the savings are paid into the pension scheme.
- Freedom – funding for, for example, holiday leave, senior leave or childcare leave.
The agreement sets out exactly which options are available, so that is always the place to look for specific details. As a general rule, an employee cannot be forced to have the amount paid out rather than, for example, putting it towards their pension – the choice is the employee’s.
How the contribution is calculated
The contribution to the flexible spending account is a fixed percentage of the salary on which holiday pay is calculated – in other words, as a rule, the gross salary. The percentage itself varies from collective agreement to collective agreement and is regularly revised during collective bargaining. You should therefore always use the current rate specified in your particular collective agreement when making calculations – the rate is not laid down in legislation. The higher the holiday-eligible pay, the greater the monthly contribution, and over the course of a whole year, the savings for many people can amount to more than an extra month’s pay.
Taxation
The amount in the flexible spending account is taxable. If the employee chooses to have it paid out, it is taxed as ordinary pay. If the employee chooses instead to put it towards their pension, it is subject to the standard rules for pension contributions.
Employee choice and payment
Employees typically choose once a year how their contributions are to be used, and can often have the amount paid out a couple of times a year in connection with time off. If the employee does not make a choice by the deadline set out in the collective agreement, you may, under certain conditions, pay out the contribution on an ongoing basis alongside their salary – provided you can document that the employee has been asked to make a choice. Otherwise, the account is settled at the end of the calendar year and the funds are paid out or transferred to a pension scheme. Upon leaving the company, any remaining balance is paid out.
Holiday leave can be converted
Under many collective agreements, an employee may choose to convert their annual leave days into an additional payment into their flexible spending account rather than taking them as leave. This is an option that the employee must activate themselves within the specified deadline, typically in the spring. Read more about holiday leave here.
The employer’s responsibilities
As an employer, you must use the correct rate, make the payment with each payslip, show the balance on the payslip and ensure that the employee is given the opportunity to choose how the funds are to be used before the deadline. A payroll system handles the calculation, accumulation and payment automatically, so you can avoid errors in rates and deadlines.
We’ll help you with your flexible spending account
It’s easy to make a mistake with the flexible spending account, as rates and deadlines vary between collective agreements. At Dansk Løn Service, we keep track of contributions, choices and payouts as an integral part of the payroll process. You may also wish to read our guide to employee benefits, or Contact us.
The rules have been simplified here and depend on your collective agreement. Always seek specific guidance if in doubt.