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Benefits: update on flexible spending.

Flexible spending accounts (FSAs), the health care and dependent care reimbursement feature of section 125 cafeteria benefit plans, have never been very popular with employers or their employees. But legislation and new technology may soon change that situation.

Cafeteria plans have been available since the late 1970s, and the FSA component allows employees to reserve pre-tax portions of their compensation to pay for health care and some dependent care expenses that are not covered by other benefits. But if the contributions are not used during the plan year, employees loose any remaining funds. "This use-it or lose-it situation has always been a big stumbling block for employees," explains Will Applegate, vice president at Mellon HR Solutions, an employee benefit outsourcing company in Fort Lee, N.J.

Employees also hate the separate claims forms used in FSA administration and the generally slow reimbursement of relatively small health claims such as the deductibles and copayments of medical claims.

Applegate says participation--which for years has averaged about 20 percent of eligible employees--has actually been dropping to about 15 percent in the past five years as managed care plans and carve outs have lowered copayments for prescription drags and other services.

Many employers aren't helping the participation problem, he notes. Although employers benefit financially from greater participation as employee salary reduction lowers the employer contributions to FICA by about 7.5 percent per $1 contributed, many employers find FSA account management to be tedious and complicated-even though most of the contribution collection and claims payment is processed by third-party administrators.

"The reduction in employer FICA payments more than covers the cost of administration, but the myth of administrative burden persists," Applegate says. "Until employers begin to aggressively communicate the benefits of FSAs to employees, participation is going to lag."

Ray Tomlinson, president of Crowne Consulting Group Inc. in Orlando, Fla., an employee benefits broker and consultant, agrees. "The numbers always add up positive on both sides of the company--for the employer and the employee."

The trend to declining participation could be on the cusp of reversal, however. In October 2001, Rep. Edward Royce, (D-Calif.) introduced H.R. 3105, the latest in several bills designed to eliminate the use-it or lose-it restriction. The bill would allow employees to carry over up to $2,000 in unused FSA contributions.

The bill has languished in the House Ways and Means Committee, but could move forward or become part of a more comprehensive health care bill in the future. If that occurs, Tomlinson says the FSA floodgates would open.

New technology can also help administrative problems. In the past three years, several vendors, including Med-i-Bank in Waltham, Mass., and Motivano Inc., in New York, among others have introduced stored value debit cards for FSAs.

Employees use the cards like bank debit cards to pay directly for services reimbursable by FSAs such as deductibles and office visit copays, eye exams and laser eye surgery, and prescription drug copayments. The cards are programmed to accept only covered benefits and services. The card services cost about $1.50 per employee.

"The cards simplify the FSA administrative process for employers and provide most of the claims adjudication that had made the process move so slowly," says Tomlinson, whose company markets the Med-i-Bank FlexConvenience card to employer clients and third-party administrators.

The card companies also manage the FSA account balances and provide online or toll-free telephone access to employees. "Participants can go onto our Web site and identify their exact account balance," says Rob Butler, vice president of sales and marketing at Med-i-Bank.

Butler says employers that have used the debit card technology, including MCI Worldwide, the Arizona Diamondback baseball team, and the State of Texas, have reported a 30 percent increase in participation and an average increase of $250 in contribution per employee.

Len Strazewski can be reached at
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Author:Strazewski, Len
Publication:Risk & Insurance
Date:Aug 1, 2002
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