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According to the 2007 Health Confidence Survey by the nonprofit Employee Benefit Research Institute (EBRI), three-quarters of Americans with employer-provided health coverage (76 percent) said they would prefer $7,500 in employer-based health benefits to an additional $7,500 in taxable income.
Studies have shown that health care flexible spending accounts (FSAs) are an effective way to help employees save money on essential medical expenses. Participation is voluntary, and if employees choose to contribute, they can decide how much to allocate and have discretionary control over how they use the funds for qualified medical expenses.
FSAs are tax savings vehicles governed by Internal Revenue Code section 125 and related regulations pertaining to "cafeteria plans." In addition, the IRS issues notices and rulings to clarify use of the FSA benefit. (See, for example, IRS Revenue Ruling 2003-43 on page 935 of Internal Revenue Bulletin (IRB) 2003-21, Notice 2006-69 on page 107 of IRB 2006-31 and Notice 2007-2 on page 254 of IRB 2007-2.)
There are two key elements that make FSAs attractive to employees:
• The funds are tax-exempt. A family of four is likely to spend as much as $3,000 a year on qualified medical expenses, which can translate to tax savings of $1,020 if the employee has the money placed in an FSA account (this savings is based on the 34 percent federal income tax rate, and will vary by individuals’ tax brackets).
• Employees can use a debit card at the point of sale. FSAs allow employees to be reimbursed by check or direct deposit, or the use of an FSA debit card—a secure card that is accepted at doctors’ offices and pharmacies. Use of a debit card has the advantage of avoiding out-of-pocket payments while employees wait to be reimbursed.
The 'Use It or Lose It' HurdleThe main disadvantage to FSAs, from the employees' viewpoint, is the "use it or lose it" rule requiring employees to forfeit to the employer any unused funds in their FSAs, traditionally at year end. Helping offset this hurdle, however, is IRS issued notice 2005-42, in May 2005, permitting employers to amend their plan documents to extend the deadline to use FSA funds to up to two and a half months after the end of the plan year. For example, if the plan year ends on Dec. 31 and the employer has modified its plan to allow the extension, employees have up to March 15 to use all of their funds in the FSA from the previous plan year.
If the two-and-a-half month extension period has passed and there is still money left in the account, the money will be subject to the “use-it-or-lose-it” rule, and the balance will be forfeited to the employer.
To learn more, see the SHRM Online article New Rule Allows FSA Grace Period.
Nevertheless, there is still much confusion regarding FSAs, which may have led to (or added to) the popular misconception among employers that FSA administration is time-consuming and entails a lot of paperwork, and the belief among some employees that FSAs aren't worth the effort.
Making Debit Cards Easier To Use
The IRS guidance permits many standard FSA expenses to be processed and approved automatically, without the need for the employee to provide a copy of an invoice or receipt. This includes reimbursements for co-payments or purchases at pharmacies, physician offices, hospitals and other service providers. Claims can be approved and reimbursed unconditionally without further documentation (under Revenue Ruling 2003-43) when they satisfy the following criteria:
• Co-payment match. The dollar amount of the transaction charged by a health provider equals the dollar amount of the co-payment for that service under the employee’s accident or health plan (also, multiple co-payments are permitted to be reimbursed automatically with certain restrictions).
• Real-time substantiation. The merchant, service provider or other independent third party (such as a pharmacy benefit manager) verifies at the point of sale, directly to the employer (via e-mail, the Internet, intranet or telephone), that the charge isfor a medical expense by cross-referencing the purchased item's stock keeping unit (SKU) against the policy’s authorized purchase list and providing the costs.
• Approved recurring expenses. The recurring expense matches the expenses previously approved as to the service fee amount, provider and time period (such as a dependent child’s orthodontia, continuing physical therapy treatments, and the like).
If a transaction does not fit into one of the criteria described above, additional documentation will need to be submitted by the employee to the claims reviewer (either the employer or the service provider) before the debit card expense can be approved unconditionally. However, with some planning by the employer, FSA administration can be largely automated and relatively paper-free.
Employee Education Is Key
Employers who take the time to educate their workforce on the benefits of these programs and how best to use them see much higher program participation rates, which results in greater employee satisfaction and greater tax savings.
-------------------------------------------------------------Employers who educate workers about FSAs seehigher program participation, resulting in greater tax savings.-------------------------------------------------------------
Because FSAs are highly individualized instruments, employees must be actively engaged in the decision-making process from the beginning. Before signing up for an FSA, employees must understand how an FSA is set up and managed and must know the rules regulating its use. In addition, they need to understand what specific services and products are covered and those that are not.
As with other workplace initiatives, it can often be difficult to encourage participation. Employers should consider putting together a comprehensive rollout strategy, with two distinct phases:
1. Raise awareness that new benefits are coming, or that an existing benefit is being overlooked.2. Give plan participants the information and tools they need to participate in the program.
The first step is to develop an integrated communications plan. This should be a well-coordinated, organizationwide effort, with the following steps:
• Create a committee to spearhead the campaign and oversee its implementation.• Set a timeline that takes into account how long it will take to design, print and distribute promotional collateral pieces, such as posters, advertisements and brochures. To have maximum impact, the campaign should have a consistent theme and look.• Designate individual staff members as “messengers.” These people would need to be trained so they can represent the plans accurately and field questions. Training should be built into the rollout plan.
Once the committee responsibilities and tasks are defined and the campaign materials are in hand, the campaign can begin. The awareness campaign should begin at least a month before enrollment. The primary aim is to build anticipation and create buzz.
Marketing is the art of repetition. An audience needs to see a graphic image or hear a catchy slogan at least three times before it makes an impression. FSA enrollment can be announced using multiple communication vehicles such as:
• Posters.• Newsletters.• Brochures.• Paycheck/voucher envelopes and inserts.• E-mail campaigns.• Company intranet.• Direct mail.
The best promotional campaigns are based on consistent and memorable messaging. Not only should an advertisement capture the viewer’s interest, it also has to communicate a key selling point or benefit in as few words as possible.
Communicate the personal aspects of an FSA in posters and ads, by highlighting top-line benefits told from the perspective of an employee.
For example, in one poster, a father is carrying his son on his shoulders. The text explains how he used the FSA to pay for his son’s braces and new prescription glasses and to treat a sports-related wrist injury. It is a reminder of the unexpected costs that are part of that responsibility. At the bottom of the poster is a call to action in bold lettering: “Talk to your Human Resources department today about signing up—and start saving right away.”
Information and Tools
While posters and other promotional materials pique interest, the more important task of the communication campaign is to provide detailed information on FSAs so employees can make an informed choice.
Some companies roll out the FSA service in stages, beginning with a select group of employees, such as line-of-business managers:
• A company officer or the HR director can explain the new benefits at staff meetings or a "lunch and learn."• Larger organizations can hold training sessions for managers, so they can explain the program to their staff.
The early adopters help communicate the benefits to their staffs, and the graduated introduction lets a company refine its strategies based on the first enrollments.
Information about FSAs should be easily accessible:
• If your company has a self-service web portal, information can be posted so anyone in the company can educate themselves, 24/7.• In terms of fielding questions, an online bulletin board and frequently asked questions (FAQs) section can provide answers in an expedient manner.• A large organization might want to develop and schedule a series of webinars.
A communication plan should reflect an organization’s culture. An informal, humorous campaign is not appropriate in every instance. If employees reside over multiple time zones or work varying shifts, schedule information and training sessions accordingly. Additionally, multi-national companies must translate the information and present it in a culturally sensitive and appropriate way.
When it comes to strategic communications, familiarity leads to favorability. The more employees learn about FSAs, the more likely they are to check them out. They will seek out information and discuss the subject with other employees, friends and family members. If interested, they will perform due diligence, such as reviewing their annual health care, dependent care and/or commuting costs and figuring out how much they should contribute to offset recurring and predictable expenses.
Remember, this is not a one-shot deal. FSAs must be renewed annually, and as word of mouth grows, so will demand. Continue to communicate the advantages of FSAs after enrollment, and monitor use over time. Then, when the next year rolls around, the buzz will be loud and clear, and the testimonials of FSA users will help deliver the message.
Heffy Provost is general manager of ADP National Account Services, which specializes in outsourced payroll and benefit services for organizations with over 1,000 employees.
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