How to Explain a Flexible Spending Account

Flexible Spending Accounts (FSAs) came into being in the 1970s with passage of Internal Revenue Code Section 125, which allowed employers to offer employees "cafeteria" health-care plans. These plans allowed employees to tailor their health benefits to their own needs. FSAs didn't enjoy much utilization until the 1990s, when health care costs and out-of-pocket expenses began to rise. It's an employer's obligation each year to explain its FSA plan to employees, detailing the plans offered, benefits and costs, and any changes. Coupled with easy-to-follow literature that highlights the main points, explaining an FSA needn't be complicated.

Instructions

• 1

  Describe the concept of FSAs, pointing out that they are designed to allow participants to set aside pretax money for health-care costs that are not covered under their existing health insurance plans. Emphasize the tax-savings benefits realized by placing, say, $2,000 in an FSA for use during the following year. The employee's taxable income falls by $2,000. Be sure to tell about the once-a-year enrollment period.

• 2

  Explain, up front, the potential drawbacks of FSAs, namely that they are "use it or lose it" plans. In other words, participants must plan ahead to figure out future out-of-pocket expenses. If they put $2,000 in an FSA and use only $1,500 during the year, they lose the other $500. Emphasize the importance of planning carefully and conservatively.

• 3

  Talk about the health expenses that are allowed with FSAs, such as co-pays, deductibles, doctor and hospital fees, smoking-cessation classes, dentist bills and eye-care costs. Remind them that these costs are only reimbursable if they are not covered by the participants' existing health-care plans. Include examples in any literature you provide, and be sure to refer them to the IRS website that deals with the hundreds of procedures, services, medicines and medical items eligible under IRS guidelines. Give some examples of easily predictable future health-care costs---medicine, aspirin, cough syrup, wheelchairs, even bandages. Explain that, if someone is going to schedule a medical procedure not covered by health insurance---a vasectomy, for instance---the following year, then an FSA is an ideal way to save money.

• 4

  Point out any benefits or differences unique to your own company's FSA plan. Also explain that, while something like acne care may be an eligible expense, cosmetic acne procedures or acne skin-care products are not covered. Literature outlining these details is helpful. Mention additional non-health-care-related benefits, such as child-care costs, which are very predictable and easy to estimate for FSA contribution purposes.

• 5

  Address the differences between FSAs and HSAs (health savings accounts). People often confuse the two, but HSAs are actual savings plans that have higher contribution limits, are limited to people with an HDHP (high-deductible health plan), don't impose a use-it-or-lose-it stipulation, and can even be invested.

• 6

  Discuss contribution limits. As of Dec. 31, 2010, there are no federally mandated contribution limits although, according to the IRS, "the plan must prescribe either a maximum dollar amount or maximum percentage of compensation that can be contributed to your health FSA."

• 7

  Make participants aware of changes effective Jan. 1, 2011. H.R.3590, the Patient Protection and Affordable Care Act, caps yearly FSA contributions at $2,500 and also prohibits reimbursement of all over-the-counter (OTC) drugs without a doctor's prescription. This is a particularly sore point with a lot of FSA enrollees, who count on significant savings through the purchase of aspirin, cough syrup and a myriad other drugs and medications.