BENEFITS BUSINESS
FSAs could become more popular as move toward consumer-driven health plans grows
By Len Strazewski
"FSAs are notoriously underutilized, despite their great tax advantages for both employees and employers."
--David Polovino, President All Florida Insurance Services
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 and provide sales opportunities for agents and brokers.
Cafeteria plans certainly aren't new. U.S. tax code made the flexible benefit plans available in the late 1970s. The FSA component that 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--such as deductibles, co-payments and optional treatments such as laser eye surgery--came shortly thereafter.
This "salary reduction" allocation reduces overall employee income tax and at the same time reduces employer FICA contributions for participating employees.
However, the rules for FSA came with some severe limitations that have hampered their growth. Employers that institute the plans must collect employee contributions from payroll, and track and adjudicate claims--a cumbersome process that requires heavy paperwork in the human resources department or expensive outsourcing to third-party administrators.
The administrative burden--or at least the perception of an administrative burden--has been a serious stumbling block, says David Polovino, president of All Florida Insurance Services, a two-person agency in Jacksonville, Florida.
"FSAs are notoriously underutilized, despite their great tax advantages for both employees and employers. Human resource executives don't aggressively promote the plans because they hate the additional paperwork, and employees don't understand how the plans work because the employers don't communicate the benefits very well," he says.
What employees do understand is the notorious "use it or lose it" provision that forces employees to lose any contributions in their funds if the funds are not spent during the plan year. Polovino says employees are held back from participation because they fear mismanaging their accounts and wasting contributions.
"This 'use it or lose it' situation has always been the big stumbling block for employees," agrees Will Applegate, vice president at Mellon HR Solutions, an employee benefit outsourcing company in Fort Lee, New Jersey. Employees also hate the separate claims forms used in FSA administration and the generally slow reimbursement of relatively small health claims such as deductibles and co-pay amounts of medical claims.
Applegate says participation--which for years averaged about 20% of eligible employees--has actually been dropping to about 15% during the past five years as managed care plans and carve outs for special services such as prescription drugs or orthodontia have lowered co-payments. He also notes that many employers aren't working hard enough to improve the participation problem--even though they reduce FICA costs by about 7.5% per $1 contributed.
"The reduction in employer FICA payments more than covers the cost of administration, but the myth of administrative burden persists," Applegate says. "And 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, Florida, an employee benefits broker and consultant, also believes employees and employers are missing a great benefit. Crowne Consulting specializes in employee benefits and related insurance sales and has five employees.
"I'm amazed by the number of large and medium-sized employers that have never installed a section 125 plan. The numbers always add up positive on both sides of the company--for the employer and the employee," he says.
Agents, however, may be able to turn the problems with FSAs into a sales opportunity. Congress is considering reversing the "use it or lose it" rule--which may eliminate one major barrier. In October 2001, Representative Edward Royce, (D-California) 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 since its introduction 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.
"The health plan industry continues to move toward the more consumer-driven model, using various kinds of health care spending accounts to fund consumer choice. As support for these sorts of plans continues to grow, the rules could change to help facilitate flexible spending designs," he says.
New technology can also help the administrative problems. In the past three years, several vendors, including Med-i-Bank in Waltham, Massachusetts 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 co-pays, eye exams and laser eye surgery and prescription drug co-pays. The cards are programmed to accept only covered benefits and services and the card companies also manage the FSA account balances and provide online or toll-free telephone access to employees who can better manage their contributions. 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 brokerage has marketed the Med-i-Bank FlexConvenience card to employer clients and third-party administrators (TPAs) for about eight months.
All Florida Insurance Services has also successfully marketed the debit card technology to both employers and TPAs since the product was announced about three years ago. "I've had good luck with both markets as the concept of debit cards has become more popular in retail transactions," he says.
"Employers still need to manage the payroll deductions, but the card creates the access to the benefits and handles most of the claims adjudication. Human resource executives are always looking for a way to add benefits without more cost or work, and this fits both of those needs."
Polovino says the debit card technology has also opened more doors for the agency, giving him something new to promote and a reason for employers to review their agency relationships.
Employee feedback also has created some positive buzz for the agency, he says. Employees appreciate easy payment without claims forms and reimbursement and can better track their use of their funds.
"Participants can go onto our Web site and identify their exact account balance, allowing them to make more effective use of their contributions and eliminate the problem of losing unused funds," says Rob Butler, vice president of sales and marketing at Med-i-Bank.
He says employers that have used the debit card technology, including MCI Worldwide, the Arizona Diamondback major league baseball team and state of Texas employees, have reported a 30% increase in employee participation and an average increase of $250 in contribution per employees.
Butler says the company also provides sales support for agents and brokers and participates in employer sales calls if necessary.
"Agents, brokers and employee benefit consultants don't have to become experts in debit card technology to market it. Most individuals now understand the value of plastic card technology through the use of ATM cards, prescription drug cards and retail debit cards," he says.
The details of the employee benefits transactions are buried beneath the technology, he notes.
Meanwhile, stored value debit cards are also being used to support other employee benefits products. Last year, Stancorp Financial Group in Portland, Oregon, introduced SecureCard, a debit card payment option for group long term disability (LTD) benefits paid
by the company's Standard Insurance Co. subsidiary. In June, the system
also became available for individual LTD customers.
LTD benefits are deposited into the SecureCard Visa account instead of being mailed as a paper check or direct deposited into a savings account and recipients use the card like a standard Visa bank debit card for retail transactions or to make withdrawals from ATMs.
The technology not only reduces administrative cost for the insurer, it facilitates financial transactions for disabled LTD policyholders, says Kim Ledbetter, senior vice president for individual insurance and retirement plans.
"It is our job to provide customers who become disabled with the greatest possible convenience and every opportunity to return to productive life as soon as possible," Ledbetter says. *
The author
Len Strazewski has been covering employee benefits issues for more than 20 years and is employee benefits editor of Human Resource Executive magazine. He has an M.A. in Industrial Relations from Loyola University.