Are Your Employees Using Their FSAs?

For almost 30 years, employers have been using flexible spending accounts (FSAs) as a means to help offset rising healthcare costs while helping employees save money on uninsured medical and dependent care expenses through pre-tax deductions. But while more than 94% of large employers offer FSAs (according to Hewitt Associates), relatively few employees are taking advantage of these tax-deferred arrangements.

In a recent study by Mercer Health & Benefits, only 20% of employees take advantage of the healthcare FSAs available to them and even less (about 3%) utilize dependent care FSAs. Considering the potential tax savings FSAs can generate, many employers often wonder why so many workers refuse to participate in these plans.

One reason for this is the “Use-it-or-lose-it” aspect of FSAs, where any FSA funds that go unused in the benefit year must be forfeited by the employee. Many employees find it hard to budget effectively for the coming year and even more difficult to keep up with their medical expenses throughout the year.

The Internal Revenue Service has done their part to make FSA funds more accessible by adding over-the-counter drug purchases to the list of eligible expenses. They have also instituted a 2½-month extension that allows employees to access FSA funds through March 15 of the following benefit year. According to the Mercer study, however, only half of surveyed employers have elected to implement this extension.

Some FSA vendors offer Flex Debit Cards that actually help plan participants by tracking eligible expenses for them. The cards have been growing in popularity since major merchants like Wal-Mart began allowing their usage. One particular North Carolina-based vendor reports a 20% increase in FSA participation in the first year of using Flex Debit Cards. As more merchants continue to accept the cards at their retail locations, vendors could see a significant growth trend in FSA participation.

Another reason for low participation is strictly a lack of understanding – many employees simply don’t understand how FSAs work. One FSA vendor found that having direct, in-person educational sessions with client employees actually boosted participation an average of 10%.

Employees that are taking advantage of their company’s FSA plans rarely forfeit any funds they deposit into the accounts – and they’re saving a significant amount of money. According to the Mercer study, the average health FSA had $1,261 in 2006, and employees forfeited an average of just 4% those funds. Given the current deductions for Social Security and Medicare, a person in the 25% tax bracket actually saves $411 with an FSA of that amount. For dependent care FSAs, the average contribution in 2006 was $3,122, which would save someone in the 25% tax bracket over $1,000 in taxes.

Clearly, it is important to educate your employees of the value of the FSAs that are available to them, as well as the tools that their FSA vendors can provide to help them track their expenses. FSAs aren’t for everyone, but they can provide financial relief if needed – and that is something that every employee values.

For more information on this subject, please visit the following links:

Pay the Doctor Bill, Not the Tax Bill

The Best Way to Save on Healthcare Costs

Questions or comments about this article? Email us at comments@hcwbenefits.com.

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December 7, 2007

Hill, Chesson & Woody strives to keep our clients' group decision makers abreast of trends influencing the employee benefits market. Look for Eyes on Benefits to bring you news and information affecting you and your employees.

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