$500 rollover can be voluntarily adopted by employers, but some are taking a wait-and-see approach
NEW YORK (Reuters) — The United States Treasury has removed the "use-it-or-lose it" restriction of flexible spending accounts, but it is not clear whether the change will encourage more workers to take advantage of this way to stash away money tax-free to pay for healthcare expenses.
Right now, less than one-quarter of U.S. workers have FSAs, according to Mercer, a leading benefits consultant. A major reason is that they run the risk of forfeiting the money they set aside unless they spend it in the same calendar year.
But in late October, the Treasury Department announced a new US$500 rollover option that companies can adopt voluntarily.
Employers are eager to offer rollover plans because leftover FSA money has been a sore point with employees for years, says Steve Jackson, senior vice president of third-party benefits administrator PrimePay.
Overall, some 14 million workers participate in FSA plans. Employees at big companies typically forfeit $60 per person in their FSA each year, says Mercer consultant Chris Renz. At smaller companies, like the ones on PrimePay's roster, the rate is closer to $70.
One drawback to participation in the rollover option, though: It cannot be used in conjunction with the "grace period" that many employers offer to allow plan participants to spend leftover FSA money in the first quarter of the following year.
Nevertheless, benefits administrators expect a majority of companies to jump on board by 2015. They also expect an increase in the number of employees who participate and the amounts they contribute in pretax dollars.
Open enrolment
It is open enrolment season for benefits, and many companies are asking workers to decide how much they will contribute during 2014 to their FSAs, up to the $2,500 limit. Since the rule change was just announced, employees may not be able to find out in time if their company is going to adopt a rollover program, and when it will be effective.
"When I saw the bulletin, I thought great, but not now," says Shannon Swanson-Arend, director of benefits and wellness for New Brighton, Minnesota-based APi Group Inc, parent of 40 fire-protection, industrial and construction companies.
The timing makes it hard to lure workers who were afraid of losing FSA money in the past. Indeed, about one in four do leave money on the table currently, says Alegeus Technologies, the largest provider of benefit administration services.
Benefits administrator HR Simplified found one client with about 9,000 employees had nearly half of those with an FSA lose money last year. As 94 per cent of them lost less than US$500, it shows the potential value of a rollover.
The company is now considering adopting the rollover, perhaps even for the 2013 calendar year, which just has two months left, says HR Simplified President Mike Melnychuk.
If your employer adopts a rollover for 2013, be prepared to spend your FSA account down to $500 fast, the way you would if you were up against the grace period deadline, says Mercer's Renz. The good news, he adds, is that this might be the last time you rush around buying extra eyeglasses to use up your funds before you lose them.
Wait and see
Most companies will probably wait to add the rollover in 2014 or later. Industry experts expect that many employees can then be enticed to contribute to an FSA, since up to US$500 would then be essentially risk-free. (One potential hitch, however, is that if workers build up an account balance and then leave a company, they need to spend all the money or lose it.)
APi Group, an HR Simplified client, says it might not make the rollover change until 2015, if at all. First, the company plans to look at the spending patterns of workers to see if a grace period is more advantageous.
Another factor in deciding whether to implement a rollover may be how the company previously dealt with leftover FSA money, which it can neither take as a profit nor give back to the employee.
For a company with just a few dozen employees, the funds do not amount to much, but for one with 10,000 workers, the unused money may total more than US$500,000, according to experts. Companies typically use it to cover unspecified "administrative costs."
Helen Darling, president of the National Business Group on Health trade group, says some employers put the money back into the general pool to help offset health care premium increases.
At APi, however, the amount left over was negligible. "We wouldn't have a budget impact at all," says Swanson-Arend.
Companies are not worried about losing access to the funds, says Joe Jackson, chief executive officer of benefits administrator WageWorks Inc. When he started the lobbying effort a few years ago to get the rollover, he polled companies. Their unanimous response: "We don't like getting that money."
For a large company, Renz says this is because even US$600,000 in leftover FSA does not do a lot to bend the benefits cost curve.
"It's an employee relations issue," he says. "I don't care if you lose $5 or $500, it's going to leave a bad taste in your mouth."
