Are select benefits a racket?
November 10, 2010 8:48 AM   Subscribe

Are flexible spending plans a racket? Where I work we have a benefit called a "select benefit account" which seems to be called a "flexible spending plan" other places. We can add pre-tax money to an account which can be used for medical expenses. If the money isn't used in the year, then "you lose it". The tax benefits of this plan are obvious. What isn't so obvious is where that money is going when it is lost. Who is making money off this?

There seems to be some business that is handling my select benefits account that isn't the normal payrole.

I'm sure that this is all IRS law and stuff buy why can they not give me my money back at the end of the year and then have me pay tax on it? They could even withhold the tax on it and send me something like a w-2.

To me this looks like a law with a built in risk of some money slipping through the cracks. Who is cleaning up those cracks?
posted by bdc34 to Work & Money (25 answers total) 7 users marked this as a favorite
 
Where I work, my company gets the excess, but we are self-insured. I'm not sure if that is the same across the board.

FSAs are absolutely not a racket, though; they just take some planning. Add up how much you will spend on prescriptions and co-pays for doctors' visits. Throw in some extra if you wear contact lenses or glasses, or have other routine medical expenses. Then have that amount deducted from your paycheck. It's a good deal.
posted by something something at 8:52 AM on November 10, 2010 [1 favorite]


It's "use it or lose it" and your employer keeps the money if it's not used. There's often a grace period in the beginning of the following year to give you an opportunity to catch up. There's usually an administrator (issues debit cards, adjudicates allowable expenses, etc.) but they're just paid a monthly fee. They don't get to keep the money.

It's not really a racket -- employers don't make much on it and they're usually covering the cost of administration of the benefit for the employees. Employers don't want to make money off their employees in this way! Some people are just not so great at estimating how much they'll use. I find that usually only happens once for most people, though.
posted by MarkAnd at 8:56 AM on November 10, 2010


If you don't use it the company gets to keep it! Ain't that nice? Not really.

If you have regular, known expenses like daycare for your kid, then these accounts reduce your pre-tax income. You save a little on taxes down the road while you are putting money away for known expenses or other medical expenses -- eyeglasses, co-pays, prescriptions, etc. That is the only benefit to you.

If you screw up and don't use the money, then they take it which is, I think, a pretty shitty thing. Give them some profit for managing the account but perhaps you should be able to get it rolled into a company 401(k) or an IRA or something at the end.

Don't participate if you don't think you'll use it, or keep your contributions low enough that you know you can use it up.
posted by amanda at 8:56 AM on November 10, 2010


The money goes to your employer.

I wouldn't say it's a racket because the company is basically fronting you the entire amount you elect to have deducted as soon as you elect to have it deducted. If you put in $1000 on January 1st, have a $1000 surgery on January 2nd and then quit on January 3rd, your employer is responsible for payment on your FSA. This happens quite often and is probably balanced out by unclaimed monies of which you speak (average is less than $50 per employee).
posted by Siena at 8:59 AM on November 10, 2010


My company is not self-insured, and it's the insurance company that gets the money back. Every year we have a benefits meeting, and someone points out exactly what you did (they could just give us our money back and take taxes out of it at the appropriate rate), and the benefits rep hems and haws and chokes on her brandy and gives us a line about how giving us a refund would cost too much, and that absorbing our unused money helps cover their administrative costs. Or something.

So, it would behoove you to underestimate for your first year, and then use your previous years' receipts (which they'll probably make available through their website) to estimate for FY2012. If you can hit the sweet spot between over and underwithholding, you're saving something like 30% on your medical expenses, which is definitely worth it.
posted by Mayor West at 9:00 AM on November 10, 2010


I'd also like to add that if you have certain medications or procedures that you have done on a regular basis - you should consider all those things as well as all co-pays and OTC medications (though you should check with your company to see if they cover these items - as of this year, mine doesn't). It is absolutely possible for you to figure out, within $50, how much you'll spend on trips to the doctor, dentist, ophthalmologist. Err on the side of under-contributing if you're concerned about leaving your money in your company's pockets.
posted by Siena at 9:06 AM on November 10, 2010 [1 favorite]


Every year we have a benefits meeting, and someone points out exactly what you did (they could just give us our money back and take taxes out of it at the appropriate rate), and the benefits rep hems and haws and chokes on her brandy and gives us a line about how giving us a refund would cost too much, and that absorbing our unused money helps cover their administrative costs.

I thought that they could either use the money to pay for future administrative costs or give the money back (taxed) divided equally among plan participants? I don't really get how returning it equally to everyone on the plan is any fairer than the company using the money to pay for future admin.
posted by MarkAnd at 9:10 AM on November 10, 2010


I loved loved this benefit when I had it -- perfect for dental expenses. I always used every dollar. If you're worried about having "left over" money, know that many items -- e.g. many over the counter items from Walgreens, parking at doctor's offices, each $10 co-pay, etc. -- are qualified expenses. If you save your receipts you can turn in the bits and pieces at the end of the year to suck up any last bits of money (so long as your prediction was in the general ballpark).
posted by ClaudiaCenter at 9:19 AM on November 10, 2010


Just as an FYI, beginning in 2011 over the counter drugs are no longer covered. It's part of the new health care bill.
posted by something something at 9:28 AM on November 10, 2010


I am mainly interested in where the lost money goes, who is making money off of that and why can they not give it back with taxes taken out of it.

It also looks like a $2500 that will go into effect in 2013 is part of the health care bill.

I think it is a useful benefit and I understand that one needs to estimate the expenses. Thanks to the folks who are offering advice on how to use this account, but that isn't my question.
posted by bdc34 at 9:30 AM on November 10, 2010


That was suppose to be:

It also looks like a $2500 cap to these accounts that will go into effect in 2013 is part of the health care bill.
posted by bdc34 at 9:32 AM on November 10, 2010




From what I understand, you also lose the money if you are canned, or otherwise leave the company. So, you put lots of money in, in anticipation of your child's braces or something along those lines, and if the rug gets pulled out from underneath you, then you still have to pay for your kids' braces and the money you've allocated for that is gone. I vote that it is a racket! My husband refuses to put more in the spending account than we could stand to lose... in this economy and uncertain times, this is very little... so we get very little tax benefit. His employer can pat itself on the back because they've offered us "this wonderful benefit" which is mostly unusable because NOBODY can predict the future. I believe my husband is smart for insisting on not putting much in it... but the situation irks me to no end.
posted by molasses at 9:41 AM on November 10, 2010


We have a flex account, we contribute based on known expenses (glasses, contacts, typical copays and deductables). If you don't overfund it, it's a good deal. We've never turned a penny back.

End of the year, money in the account? Who needs new prescription sun glasses, a year's worth of contacts, or their teeth cleaned?
posted by HuronBob at 9:41 AM on November 10, 2010


But here's the part that a lot of people don't realize. You do not have to wait to accrue your FSA benefits. If you sign up for a total $500/year deduction, that $500 is available to you as soon as that benefit cycle starts (usually follows the calendar year). You also get the full $500, even if you leave the company in March and have only contributed $50 as long as you spend the money before your last day of employment. Example: I left a company with whom I had an FSA plan in August to return to grad school. I probably a $600 or so total. I'd contributed about $300, but was entitled to the entire $600 and was informed of this by the HR person, so in addition to getting new glasses, I got prescription lenses for my sunglasses. Anything left over was used for FSA approved items on drugstore.com. Also, while you must purchase the items or pay for the service before you official last day of work, you can submit the receipts anytime within the guidelines for that year. So yes you can lose the money if you're not careful, but it seems that a lot of people aren't aware that in some cases it can work to the employee's advantage.
posted by kaybdc at 9:42 AM on November 10, 2010


I believe the law that allowed these set up this system (rather than allowing refunds ) so that there would be a way to pay the administrators. Employers/administrators don't have a choice to handle it a different way. The government didn't want to administer it, or allow you just to take these expenses as deductions when you file your taxes. Perhaps employers lobbied successfully that it would hurt their bottom line to handle the administrative work. And so this scheme was hatched to provide an incentive to administrators without taking it out of the government or the employers or most employees' pockets.

Think of it as a prime example of what it took to get a law passed - clearly some compromises were made somewhere.
posted by Sukey Says at 9:54 AM on November 10, 2010


Also, any money left in one employee's account can be used to offset things when another employee uses their entire yearly election and then left employment before all of it was deducted. Employers and employees both take a certain amount of risk with these plans.
posted by expialidocious at 10:16 AM on November 10, 2010


As expialidocious says, it's a risk pool--it's not like companies or insurers make bank on people not expending everything they funded, because some people leave before fully funding already-expended FSAs.

I always used to buy eyeglasses in December with whatever was left in my FSA. I had some fun eyeglasses then.
posted by Sidhedevil at 10:31 AM on November 10, 2010


The plan literally reduces your income by an amount that you request. That money is used by the company to directly cover medical expenses not covered by insurance. If you don't have expenses, the employer keeps the money, because you reduced your pay. These plans can backfire on employees, but in every company I've been in that had one, the employer is *not* trying to screw you. They're trying to partner with you to reduce your taxes.

I wondered about what happened if you left the company. Cool. thanks for the info kaybdc.
posted by theora55 at 10:45 AM on November 10, 2010


The employer can't give you back the balance with tax taken out because it's against IRS rules.

There's some discussion of the tax philosophy behind this starting on page 6 of this report. My layperson understanding is that the general idea is that if you receive money as salary, then it has to be taxed; the various pre-tax amounts taken out of your paycheck are allowed to be untaxed because those amounts are considered to not be part of your salary ("voluntary salary reduction"); and if you could expect to receive the unused balance of an FSA that would make it too much like salary and they would have to tax it.
posted by yarrow at 11:03 AM on November 10, 2010


At my last job, we had a relatively high cap or $5000 for the medical FSA plan. In my last year there we had two people use their entire $5000 in the first quarter of the year and then leave not more than a month later. The amount we got at the end of the year from people not using their funds came to about $3000. That amount doesn't even cover the administrative costs of running the plan much less the $10,000 we were out from those two people.

In all the years doing I saw the amounts we NEVER made money on the plan as a company, not even close. But that wasn't the company's reason for providing the plan. Talking to other people in HR at other companies, they also said their company never came out ahead at the end of the year with FSA plans.
posted by magnetsphere at 11:31 AM on November 10, 2010


Thanks for the discussion, this is some interesting stuff.

So no one makes a load of money off this. In one way it looks like the government setup a system of tax refunds where the expense of administering the benefit is pulled from risks that the employees and the employers take. Sukey Says: ya, it is rather involved set of compromises. I'm glad that I don't have to sit in on the meetings where they come up with this stuff.

yarrow But, does that preclude the FSA giving your unspent money back to you with taxes taken out and requiring that you pay tax on that money? Why not just have some record that you received this money like a W-2? It is likely that the unspent money is intended to fund the operation of the benefit.
posted by bdc34 at 12:39 PM on November 10, 2010


It sounds like what you're describing, or something similar, actually happened for a while in the early 1980s (under the name of ZEBRAs, "zero balance reimbursement accounts") until the IRS cracked down. If you're really interested there's an account of how the current setup came to be on pages 319-329 or so of this nerdy book.
posted by yarrow at 2:51 PM on November 10, 2010 [1 favorite]


Huh. Re: Magnetsphere above: When my firm laid us off, they took the uncontributed amount of our last checks. So, I had asserted to take out $500 over the course of the plan year. I had used about $400 by that point but maybe had only contributed through my payroll deduction $250. So they took out the $250 and I made a slew of appointments and whatnot to send in for reimbursements. I didn't get a "free" $150.

Seems to me that they had fairly well covered that loophole but maybe it depends on your state. It surprises me that someone could "skip out" and essentially owe $5k.
posted by amanda at 3:40 PM on November 10, 2010


Amanda - California has VERY strict rules about what can and can't be taken out of final paychecks, guess what can't be? We were within our legal right to attempt to recover the money through small claims court but I don't know of any company that actually did this. When I talked to our VP of finance about it (because employees were always asking pretty much the same question as this one here) she told me that this was the risk the company took, while the employee took the risk of not spending all the money.

This same thing was cited by my other HR friends as reasons why their medical FSA limits were a lot lower. Most had limits in the 1000-2500 range. They were all shocked that our company was willing to put it so high and take that level of risk.

This was a special case year, that I used to illustrate my point, we didn't have this issue in any other year. I guess I should have stuck with the fact that no overage ever even covered our normal administrative costs of running the plan.
posted by magnetsphere at 3:55 PM on November 11, 2010


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