Flexible spending accounts have always been an attractive option for those on employer-sponsored health plans. But one provision has traditionally soured the deal for some.
FSAs “use it or lose it” rules have required enrollees to use all of the tax-free money they put into FSAs by the end of the year (sometimes with a grace period), or they lose the money. Many unnecessary pairs of glasses have been bought as consumers try to get something of value with their lingering account balances.
But “use it or lose it” has changed. In 2013, the Treasury Department amended the FSA rules, allowing consumers to roll over $500 from one year to the next. With an estimated 35 million Americans using FSAs, the new rule could have a huge impact.
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“That’s a substantial change,” said Bruce Elliott, manager of compensation and benefits for the Society for Human Resource Management. Elliot added that the rollover provision could change FSA participation in two ways.
“I think we’re going to see higher levels of participation [in FSAs] and higher levels of elections — where the employee will contribute the maximum or close to the maximum level,” he said.
The change was greeted enthusiastically by employers and third-party-administrators, which help companies oversee health plan offerings such as FSAs. WageWorks, a San Mateo, Calif.-based company that specializes in administrating consumer-directed benefits, praised the move, saying it will help eliminate wasteful spending by employees trying to use up FSA dollars at the end of the year.
According to Laurie Lemay, chief relations officer for HRC Total Solutions, a Manchester, N.H.-based TPA, benefits groups have been asking regulators to change the “use it or lose it” rule for years. She says the new rollover provision will bring more people to the FSA model.
“We expect it to have a positive impact,” she said. “A lot of employers have decided to adopt it.”
Businesses should note the change is not automatic; companies still have to choose whether to offer the new rollover provision, and they will need to inform employees if they make the change.
A popular benefit, but…
A 2014 survey showed Elliot’s group that 68 percent of businesses offered medical FSAs.
Even with that relatively high take-up rate, some have been wary of FSAs. The “use it or lose it” provision has been cited repeatedly as a disincentive to participate in the accounts. Health care costs can be hard to predict precisely, and consumers feared ending the year with significant amounts of money sitting still unspent in the accounts. Even with some companies offering grace periods—for example allowing employees to use their FSA account funds through March of the next year — the prospect of forfeiting dollars at the end of the year was troubling to some.
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“One of the main things that people cite in surveys about FSAs is that they fear losing their money,” said Jeremy Miller, FSA Store.com founder and president.
Miller’s company works with TPAs such as HRC Total Solutions, and provides an Amazon.com-type retail website for FSA accountholders. The site provides tools and education about spending accounts, along with a wide range of health care products.
Miller said the lack of a rollover feature in plans with FSA might have played a role in the rising popularity of health savings accounts. Although the latter have high deductibles, their funds are portable (an enrollee can keep the account if their employment status changes) and the funds roll over from year to year.
“HSAs have been on the rise, and FSAs have had pretty flat growth,” he said. “Hopefully this rollover provision will increase that growth.”
Timing is everything
Both Miller and Elliot noted that after the rule change in October, there was not an immediate jump in the number of companies offering the FSA rollover feature, but they said that could change.
“That rule change came so late in the year,” Elliot said. “Most employers had already started their open enrollment period, so they really didn’t have time to amend their FSA plan documents.”
He said he expects more employers will include the $500 rollover feature this year in their plans.
“I anticipate a large majority of employers are going to take advantage,” he said. “Because it doesn’t cost a lot to do that, and it’s kind of a feel-good thing for employers to do for employees.”
Getting the word out
According to Miller, educating employees about FSA rules, including the new rollover rule, can help boost participation. He said companies should inform employees about the new rollover rule, or, if a company has a grace period for FSA accounts, make sure employees know the deadlines.
Companies also can educate employees about what items and expenses are covered by their company’s FSA. For example, Miller said, many consumers don’t know that common items such as sunscreen and first-aid kits are covered by many FSA accounts. Other tools, such as FSA debit cards and calculators, can help enrollees feel more comfortable with using the accounts, he added.
Miller also noted that consumers might have to invest a bit more time in thinking about their health care spending when considering FSAs. He estimates that $400 million in FSA funds are lost each year because employees don’t understand their plans or don’t know what’s covered.
“Most people just think about this during open enrollment, and there’s kind of a rush to grab a plan. If they can just plan ahead and look to see what’s covered, it can result in a considerable tax savings,” he said.
Elliot said employers seeking to implement the rollover provision should work with the TPAs to update their company health plan documents and summary plan descriptions, in order to make sure that those documents reflect the FSA changes.
“Their TPAs should be working with them, and should be reaching out to them proactively to begin the plan amendment process,” he said. “Because you want that amendment in place before the end of this year. And it really is a pretty simple process.”
Lemay said her group is seeing a number companies switch from the old grace period arrangement to use the rollover provision instead.
“At the end of the day, it’s a benefit for the employee, and it’s a way to make sure they keep and use their money,” she said of the rollover. “It’s been a long time coming, and it’s a welcome change.”