Flex Success – New User-Friendly Features make Flexible Spending Accounts Attractive  

Flexible Spending Accounts (FSA) should play a key role in an employer’s employee benefits program.  Why, then, is this benefit so often overlooked by employers and underutilized by employees?  FSAs may not evoke the emotions of security and peace of mind like a good disability income plan, but saving money is a feel-good for most people.  Statistically, an employee is more likely to have out-of-pocket medical expenses than a disabling illness. 

FSAs can be a valuable financial asset for employees.  FSA plans can be easily and inexpensively integrated into an employer’s current benefits program.  Now, with the introduction of the Flex Convenience Card, and the recent IRS ruling that over-the-counter drugs can be reimbursed under Health FSAs, FSAs will finally gain the popularity and wide appeal that this “flexible” benefit deserves.  Here’s why: 

FSA Plans Help Employees Financially

Employees are very much aware of how taxes affect their income.  Because taxes reduce the value of each dollar earned, an employee has to earn considerably more than $100 to have $100 to spend.  Flexible Spending Accounts permit eligible employees to set aside untaxed income that can be used to pay for certain health care expenses and for day care services while a parent works.  

Most employees and their families have health care expenses not covered by insurance.  The cost of day care for the children of working parents can consume a significant portion of the parents’ paychecks.  To employees, an FSA Account is like getting a discount on the cost of these services because they don’t have to earn as much to pay for them.

FSA Plans Save a Lot and Cost Little

When an employee contributes pre-tax income to a Health Care or Dependent Care Spending Account the employer’s payroll is reduced.  Consequently, the employer saves on payroll taxes (federal, state, and Social Security); usually saving more than enough to offset the administrative costs of the FSA plan.  

FSAs Are Easy To Understand And Easy To Use

Employees quickly grasp the simple concept.  After calculating how much he or she is likely to spend annually for medical expenses not covered by insurance (deductibles, copays, prescription drugs, hearing aids, contact lens, dental care, etc.) the total estimated amount is evenly divided over the number of pay periods in the employer’s plan year. See FSA eligible medical expenses for a more complete list.  Each payday, this amount is credited to the employee’s Health Care Account, to be spent as the employee or family member has qualified expenses.  A family with young children or an elderly dependent parent would use the same process to assess their annual dependent care expenses and fund a Dependent Care Account.

The Flex Convenience Card

Participants in FSA plans used to complain about having to pay out-of-pocket for a covered expense and then wait for reimbursement from their Spending Account administrator.  With the introduction of the Flex Convenience Card, FSAs will become payment conduits that transfer funds directly from the employer to the merchant.  The Flex Convenience card is similar to the debit card issued by your bank.  When the vendor swipes the card, funds are automatically transferred from the employee’s individual Spending Account to the vendor.  Any vendor who accepts Visa or MasterCard will accept the Flex Convenience card.    

New IRS Guidelines Possible

An employee who overestimates his expenses and has money left in a Spending Account at the end of the year has to forfeit the money, under current IRS rules.  Forfeiture does not happen very often, but it seems always to loom as a formidable barrier to FSA participation in the minds of employees and employers.  The good news is that the “use it or lose it” rule is currently being addressed legislatively, and carryover of funds may be permitted in the near future.  Until then employees who are unsure about their expenses should play it safe, and when in doubt, contribute less, not more, to their Accounts.

Allows employees to reduce their salary to pay for expenses not covered by insurance such as prescription copays, doctor's office copays, eye glasses, deductibles, diabetic supplies, infertility treatment, contact enses, hearing aids, dental care, coinsurance, chiropractic services, etc.

You save federal, state and FICA taxes on the money that you set aside to pay for qualifying expenses. By using pre-tax dollars, you can save as much as 25% to 40% on qualifying day care or medical services and supplies-expenses that normally you would have paid for with after-tax funds. The following example illustrates the savings power of a FLEX Account.