Sunday, November 18, 2007

Does your Company Offer a Flexible Spending Plan?

A co-worker recently inquired as to why our company does not offer a flexible spending plan. Both he and his spouse incur high out-of-pocket medical expenses each year; almost always paying out their entire deductible. If they were able to set some of these monies, let’s say $1,000, aside each year in a flexible spending account they would be able to save about $300.00 a year.

What is a Flexible Spending Plan?
The Flexible Benefit Plan is a program that was enacted by Congress in 1978. The plan allows employees to pay for certain expenses using pre-tax dollars. Employees deduct monies from their paycheck before federal, state, social security and medicare taxes are calculated. The monies are withheld from each paycheck in equal installments and reimbursed once an employee shows proof that the service was rendered. By using the plan, you save approximately 30% in taxes on the qualifying expenses. Employers also save money. They do not have to pay their portion of social security and medicare taxes on your pre-tax deduction.

What types of expenses qualify for reimbursement?
Medical Reimbursement: Expenses paid out-of pocket for medical deductibles, vision care including eye exams, contacts, and glasses, and dental work. Over the counter drugs such as allergy, cold and flu, pain relievers, cough suppressants, anti-inflammatory drugs and smoking cessation items. Walgreen's Pharmacy codes items eligible for reimbursement with an "F" on their receipts. I have noticed purchases of prescription drugs, sunscreen, lip balm and saline solution all coded in this manner.

Dependent care Reimbursement: Expenses paid for care of a qualified dependent can be paid on a pre-tax basis. You may be able to claim dependent care expenses for children under the age of 13, certain preschool tuition and certain adult care expenses.

Independent Premium Feature: If you do not have insurance coverage through your employer and have purchased an independent policy for either health or dental insurance, you may be allowed to set aside funds pre-tax for those premiums.

Why does our company not institute a plan?
First, we were told that we can not offer a (FSA) Flexible Savings Account in conjunction with an (HSA) Health Savings Account. Our company was contemplating instituting an HSA instead of our current health plan. Despite changing our views on HSA’s, all discussions concerning flexible spending accounts are on hold.

Adding a FSA account would increase the administrative work for our already over burdened payroll department. Initially, instituting a FSA would entail more work, but typically companies contract this service out to a third party, so after the initial set up additional work should be minimal.

Adding an FSA plan will be costly. After the initial set-up costs, the account should pay for itself with the social security and medicare tax savings I previously mentioned.

Honestly, the real reason our company does not institute a FSA is that if an employee leaves the company early in the plan year, after they have been paid out all or the majority of their FSA medical deduction, but before an equal amount has been deducted from their paycheck, our company would be out the difference. In discussions with Human Resource Managers from other companies, I have learned this is usually not the case. The more prevalent scenario is that an employee leaves the company or completes the plan year without using their entire FSA deduction and forfeits their money. One way to minimize losses on both sides is for the employer to cap the amount of monies employees can place in their accounts each year. Also, the employee should use conservative estimates when determining their deduction amounts and only set aside monies for known expenses.

My Perception: The employee benefits of a flexible benefit account outweigh the employer costs of this benefit. I recommend that management consider adding this benefit.