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Sunday, May 11, 2008 |  |
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Flexible Spending Accounts (FSAa)
At Issue
Often referred to as flexible benefits plans, cafeteria plans or 125 plans, flexible spending accounts (FSAs) allow you to set aside a portion of your pay, on a pre-tax basis, to pay for certain out-of-pocket Health Care or Dependent Care expenses. If you anticipate out-of-pocket expenses for dependent care of health care expenses not covered in full or not covered at all by your health plans, you can save 28% or more by paying those expenses with money that has not been taxed. Amounts set aside in FSAs are not subject to federal or local taxes.
Employer Benefits
The reduced gross income expenses as a result of the pre-tax deductions translate into lower FICA (Social Security) taxes. Employer FICA taxes at 7.65 percent are significant. The savings for an employer with high employee FSA plan participation can be enormous.
An FSA plan is a good outlet for the employer to increase employees' take-home pay without increasing the gross wages for employees: a valuable tool in times of stagnant wages.
As more and more employers introduce FSA plans into their compensation packages, the plan may be seen as an added value, improving employee recruitment and retention.
Employee Benefits
FSA plan participation provides significant tax savings for employees. This translates into more take-home pay resulting in greater job satisfaction.
An FSA plan can cushion the financial impact to employees that results from increasing health care premiums.
During the plan year, FSA participants are able to be reimbursed for expenses that may not be covered by insurance such as:
Use It or Lose It Rule
On May 18, 2005, the U.S. Treasury Department ruled that employers can now give workers an extra 2.5 months, or until March 15, to spend money in their health care flexible spending accounts. The pretax funds in the accounts previously were forfeited if workers did not use them within a year, prompting many to spend freely near expiration in the use it or lose it plan; officials said they hope the extension will "ease the year-end spending."
NAHU's Position
The prohibition against the rollover of any funds makes the FSA take away from it's potential to reduce utilization of health care services. Created as a mechanism to save for unexpected health care expenditures, funds judiciously allocated during the year are often used to make unnecessary purchases, such as prescription eyeglasses or other elective purchases in order not to lose the remaining account balance. If a person had a health care event early in the next year, little funds would be available due to the end of the year use it or lose under the current rules.
NAHU feels this prohibition needs to be changed to allow consumers to save at least a portion of their balance to rollover into the new year.
What Others Are Saying
Some distracters say that FSAs provide an unfair tax advantage for people who are financially better off. Supporters says it is better hedge against unforeseen health care costs which can fluctuate from year to year and exposes consumers to the true costs of care.
NAHU's Action
Contact your legislators using Operation Shout! and let them know that you support H.R. 1998 and S. 309 to allow FSA rollover of $500 per year. NAHU believes it is time to let the market work rather than for the federal government to determine what is the best prescription for America's health.
Additional Resources
Senator Grassley's letter to the Treasury Department
Requesting changes to the FSA "use it or lose it" rule
Treasury Department's response to Senator Grassley
Health Account Comparison Chart
CBIZ Benefits & Insurance Services, Inc. chart comparing HSAs, MSAs, HRAs, and FSAs - December 2003
House Passes FSA Rollover Legislation
National Association of Health Underwriters Press Release - May 13, 2004
Flexible Spending Accounts: The Case For Reform
National Center for Policy Analysis (NCPA) - May 13, 2003
IRS Press Release - September 3, 2003
Ruling allows over-the-counter drugs to be purchased with flexible spending account dollars
H.R. 1 Frees FSAs and HRA's From 1099 Rules
National Underwriter (November 25, 2003)
For more information on Health Savings Accounts (HSAs), click here.
For more information, please contact Peter Stein.
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