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Why to Save the Flexible Spending Account

There are times I get a comment that’s both long enough and insightful enough that I request the author’s permission to put it up as an article. The follow guest post is from Andrew Chunis, the Business Manager at Advanced Benefit Strategies, a third party administrator of employee benefits. Andrew makes a compelling case for improvements to the FSA, not elimination. Thank you, Andrew, here’s your comment-turned-article, unedited.

Gonna have to disagree, Joe. Hear me out:

First on administration cost: Typically a third party administrator bills the employer a monthly fee per enrolled employee. However, depending on the average election, the employer is usually saving much more in taxes per employee than the monthly fee incurred, based on their FSA funds coming off of payroll.

Now the alternative to an FSA would be itemizing deductions on a Schedule A, which is currently limited to expenses greater than 7.5% of your adjusted gross income. As we know, itemizing deductions greatly increases the risk of triggering an IRS audit. For the average person this is a complex procedure to be able to enjoy all the benefits of an FSA (saving receipts, making sure you have your RX for tylenol, etc.), and the penalties and government administration of these expenses would be far higher than FSA administration. Further, this would also likely increase the administration at tax service centers such as H&R block.

So far from being overly complicated, the FSA actually simplifies the tax process for the participant a great deal, simply by removing these funds off their W2. Without question, the average person currently receiving tax benefits on their FSA would not get the same benefits on itemized deductions. And any “efficiency” costs would be rendered moot by greater IRS auditing procedures and third party tax preparers. As far as the government is concerned, the plans are a win-win-win benefit. Win for the government: outsourcing administration to a private party; win for employers: receiving a tax benefit simply by having a plan in place; and win for the employee: removing these funds from their W2 to enjoy their tax savings.

Also, technology is simplifying the FSA process a great deal. We have FSA debit cards that can process transactions at the point of service: eliminating the reimbursement process. We have smart phone apps that can read your documentation and automatically submit for reimbursement/adjudication. We have dependent care affidavits that only have to be set up once and automate the reimbursement process for the rest of the year.

Rather than scrapping the Flexible Spending program, we should really be expanding it. Some of the proposed legislation would have fixed some current issues with the plans: add a possible roll over for unused funds, allow for OTC items without an RX, and possibly even use the accounts for health and wellness expenses such as gyms and exercise programs.

It does look like the current administration would like to kill the FSA, which would be unfortunate. They are probably one of the main tax benefits working class people can enjoy, besides maybe the EITC.

I will say though that employers would do right by getting a quality administrator for their plan, rather than just looking for the lowest cost.

  • TekGems January 18, 2012, 12:04 pm

    > technology is simplifying the FSA process a great deal

    Looks like your employer needs to get with the times.

    As I see it, the higher your tax bracket, more reason for you to have an FSA. Push your employer for a streamlined plan, like a FSA debit card.

  • Andrew January 18, 2012, 11:07 am

    Thanks Joe! I did write this kind of off-the-cuff so please forgive me for any grammar/stylistic/tonality errors! I’ll check back frequently if there are any questions or objections I would be happy to reply.

  • JOE January 18, 2012, 5:58 pm

    I agree 100%. If my experience were better, the system more fluid, I’d have a different attitude. Which is why I welcomed the guest post for another view.

  • Dave January 21, 2012, 11:42 am

    I agree, but with comments…

    1. FSAs are great IF you can reliably estimate your medical expenses from a year and several months out. And as long as you can get within ~90% of your expenditures, you’ll save money even if you don’t get to the total amount you commit to. Remember: The FSA deductions are pre-tax so your saving at least your marginal tax rate percentage.

    2. FSA Credit/Debit cards are a pain. My experience had me faxing copies of receipts to the administrator to ‘verify’ the charges anyway. It was easier to just cut up the card and claim the refund via the faxed claim form. [YMMV]

    3. A slightly unknown benefit: IF you get laid off, and IF you have medical expenditures before your termination date, THEN you can get reimbursement up to your the TOTAL AMOUNT you committed to, even though you have not had the total deduction.

    e.g. I was laid off January 4th with a termination date of January 15th. I had committed to a $3000 FSA but had only made a total of $125 in deductions. After several dental crowns and new eye glasses, before the 13th, I was able to claim and receive the full $3000. Tax Free. 🙂

  • JOE January 21, 2012, 12:31 pm

    Dave – great points – even a bit of a loss may be a net positive as the money held is pretax. On point 3 – this, presumably is funded with the others’ forfeitures. Thanks for visiting!

  • Poor and Broke February 16, 2012, 12:14 pm

    Why should employees get tax-exempt benefits? Burger flippers toil for every measly dollar they earn and don’t get tax-exempt benefits.

    The rest of you should pay tax on your compensation just like burger flippers do.

  • JOE February 16, 2012, 2:31 pm

    Thanks for sharing your thoughts. I believe anyone under, say $100K, should get their health costs pre-tax.

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