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TOUGH TO GRASP

TOUGH TO GRASP

Flex Spending Plans Can Cut Taxes, Costs; Explaining Benefit is Often a Problem

By SHERRI CRUZ

Flexible spending accounts can be a boon for employers and employees. Now if companies could only get workers to sign up for them.

“The challenge is getting the employees to understand it and do it,” said Cathy Daugherty, a healthcare insurance broker at Trademark Insurance Marketing Inc. in Orange.

Flexible spending accounts, sometimes known as 125 cafeteria plans, work like this: At the beginning of the year, employees estimate how much they’ll spend on mostly healthcare and childcare in the 12-month period. A portion of that amount is deducted from the employee’s pretax income each paycheck and goes into an account.

As bills come in, the employee draws on the account by submitting claim forms and receipts, typically by fax. Workers are reimbursed with a check.

The benefit: The employee’s taxable income base is reduced by the amount contributed to the plan.

The hitch: Any amount left over in the account at the end of the year is lost.

Employers also benefit because flexible spending accounts reduce payroll tax. And other costs based on payroll, such as workers’ compensation, also are lowered.

But because the plans are difficult to understand, they haven’t caught on with employees. Nationwide, only about 18% of eligible workers take advantage of the benefit. Most large employers offer them.

Employers also see flexible spending accounts as a way to reduce healthcare costs. While managed care plans were popular for many years, they “took the consumer out of the process,” said Joseph Smith, vice president of product development for PacifiCare Health Systems Inc.

“When consumers didn’t (have to) consider price, healthcare costs skyrocketed,” Smith said. “For example, consumers didn’t look for cheaper alternatives to prescription drugs because they were included in their healthcare plan.”

Flexible spending accounts differ, according to Smith, because workers have to budget their money, which encourages them to spend more conservatively. That, in turn, lowers employers’ costs.

As a rule of thumb, employers save 10 cents on every dollar for workers who use flex accounts, said Phil Hood, director of sales for Orange-based Conexis Inc., a unit of Word & Brown Insurance Administrators Inc. Hood mainly sells flexible spending accounts to employers.

Flexible spending accounts, governed by Section 125 of the tax code, give employees pretax savings on a number of healthcare-related bills, including deductibles and co-pays, dental checkups, childcare, prescription drugs and eye care.

This year, the plan was widened to include over-the-counter drugs, such as aspirin and allergy medicine.

But some kinks still need to be worked out in over-the-counter drug reimbursements, Trademark’s Daugherty said. First of all, it’s not clear which products qualify, she said. Secondly, sometimes store receipts don’t reflect the specific product that was purchased.

“Things are going to get questioned,” Daugherty said.

But there’s no doubt that flex accounts can save employees money. Especially since more healthcare costs now are being passed on to the employee, Hood said.

In fact, health maintenance organization plan rates are set for a 16.4% increase next year, with point-of-service plans rising 16.1% and preferred-provider organization plans spiking 15.4%. A big portion of the higher costs will be passed on to workers.

The flex spending accounts give employees a way to shelter those costs. But the plans are not easy to understand and they require some thought on the part of the employee, Hood said. Employees need to estimate expenses and plan a year out.

Workers can’t change their deduction amount until the beginning of each plan year, unless they go through a major change, such as the death or birth of a family member.

The risk is to employees who overestimate and don’t spend all the money they’ve deducted from their pay. That money is lost to the employer, a potential drawback that prevents many employees from taking advantage of the benefit, Hood said.

But the “use-it-or-lose-it” rule could change. If it does, Hood predicts the numbers of people using the flex benefit would increase dramatically.

While some legislation is in the works, it’s not likely to pass this year, Hood said. “But it will happen,” he said.

Another factor that could work in favor of those who want to see the use-it-or-lose-it rule change: The federal government recently began offering flexible spending accounts.

“(The federal government’s) got skin in the game,” said Hood, who believes this will put added pressure on lawmakers to make the rules more attractive.

A separate hurdle in attracting employees to flex spending plans: Workers must pay out of pocket expenses twice before they’re reimbursed.

Employees pay once when the money is deducted from their paycheck and later when they go to the doctor or pay their childcare bills. Workers must submit a claim form to get reimbursed, which can take up to a week depending on which company administers the flexible spending account.

Debit cards could help simplify the process. Some companies that administer flex spending plans, such as Conexis, give workers debit cards that they can use when they’re paying for reimbursable costs. That way, costs are deducted immediately from workers’ flex spending accounts and paperwork is avoided.

Conexis has seen a 25% increase in the use of accounts since it began offering the cards last October.

The benefits administrator has about 10,000 employees using the card system, which still is in the early stages of rollout.

PacifiCare also recently launched its own flex spending account plan that uses a debit card. Smith said the cards have increased dramatically the amount of participation in its plan.

But Smith said some services covered by flex plans don’t yet accept debit cards as payment. Childcare centers are one such group.

Making flex account plans easier to understand is the critical issue in making them more popular.

“Anything you do with benefits becomes complex to communicate,” Smith said.

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