Flexible spending accounts too rigid, some say

DALLAS — The spending rush is on, but it's not just for holiday gifts.

Employees who have earmarked pretax earnings for health-care expenses through flexible-spending accounts (FSAs) have until year's end to use the money — or lose it.

It's a contentious catch that has one conservative think tank calling for a change and others saying that recent tweaks to the plan need more time.

"This is the time of year when it's on people's minds," said analyst Devon Herrick, who prepared a report released this past week by the Dallas-based National Center for Policy Analysis.

"People are either losing money or rushing to spend it," he said. "Employers and employees would be better off if this could change, and the money could be rolled over to the next year."

Employees typically use these benefits for co-payments, deductibles and expenses that insurance plans may not fully cover such as eyeglasses, dental work and prescription drugs.

Suggestions for spending Year-end deadline is near: If you contribute to a flexible-spending account and still have money, you have until Dec. 31 to spend it, or your employer will keep it. Here are some ways to use it: The basics: Make wellness appointments for yourself and all dependents covered under the plan: physicals, teeth cleanings, eye exams. Specialize: Schedule appointments with specialists, as needed: physical therapists, allergists, orthodontists, chiropractors, dermatologists, etc. Visionary planning: Think about getting new glasses, prescription sunglasses or contacts, since most vision plans cover glasses or contacts only every other year. Your electives: Consider covered elective surgery or a weight-loss or smoking-cessation program prescribed by a physician. Over the counter: Buy contact-lens-care products, such as saline solution and cleaner, or over-the-counter medicine as needed. Source: Hewitt Associates The Dallas Morning News

It's a pretax benefit that saves an employee in the 25 percent tax bracket up to $325 in federal, Social Security and Medicare taxes for every $1,000 contributed, according to the Employee Benefit Research Institute (EBRI). It also saves the employer its 7.65 percent contribution.

About 20 percent of workers offered flexible-spending plans use them, according to Mercer Human Resources Consulting, which Herrick's report cites. That's a 3 percent increase from 2003.

But that number could be higher with a few changes, the report said.

Some changes Herrick recommends for the 26-year-old option include:

• Removing the employer burden. Employees get immediate access to the full amount and can spend it before it's repaid through yearlong payroll deductions. By limiting availability of the money until employees contribute to the account, employers would no longer provide interest-free loans.

• Clarifying eligibility guidelines. Last year, the U.S. Treasury Department approved over-the-counter medications as a qualifying expense. Still, some plan administrators will allow the purchase of sunscreen to prevent recurring skin cancer but not to avoid sunburn.

• Allowing employees to roll over their balances. It's difficult to gauge how much money will be needed for one year, so letting employees keep as much as $500 for the following year would encourage participation and contributions.

The last issue is the red herring of flexible-spending accounts, said Andy Anderson, an attorney with human-resources firm Hewitt Associates.

But two recent flex-spending features should help ease concerns about leaving money on the table, he said.

One is the expansion of eligible expenses to over-the-counter drugs.

The other is the introduction of the debit card for expenses, which alleviates the need to keep receipts and fill out forms to apply for reimbursement.

"The entire landscape changed when the IRS began to allow reimbursement for the over-the-counter drugs with the FSAs," Anderson said.

"I think now, it's difficult to have money left over with FSAs on Dec. 31 because there are so many day-in and day-out expenses the average American has to use the money."

An alternative plan to be rolled out by some companies next year is the health-savings account, which combines a high-deductible policy with a savings account.

Contributions to HSAs can be rolled over to the next year, but an employee may not sign up for both health-savings and flex-spending accounts.

Employers are largely responsible for encouraging participation in the accounts, analysts say.

"If they have a better understanding, they will have higher participation," said Paul Fronstin, an analyst for EBRI, which found that the average contribution to flex accounts was $1,134 in 2004.

"I wouldn't necessarily expect it to double, but maybe you'll get a 5 percent or 10 percent boost in those numbers."

Electronic Data Systems ensures employee awareness with its online-benefit registration, said Lisa Wargofchik, senior consultant for EDS' compensation and benefits programs.

"We make it a step in the process so that you can't finish the enrollment without looking at the FSAs," she said.

"Once we put it in place [four years ago], it made people more aware. It also helped create a consumer awareness around health care."

Participation has reached 20 percent, she said.