Workers may get reprieve on `use-or-lose' health accounts

PERSONAL FINANCE

September 11, 2005|By Eileen Ambrose

OFTEN TOWARD the end of the year, workers make a mad rush to the dentist, the eye doctor or even the pharmacy to buy cold medicine as stocking stuffers - all in an effort to spend money remaining in their flexible spending accounts.

That's because the rule has been that whatever worker contributions are left in these health care accounts at the end of 12 months are forfeited. But now, perhaps, there's a reprieve.

In May, the Treasury Department said employers can extend the time workers have to spend money in the accounts by two and a half months. To get the extra time, employers must amend their plans. Some are expected to wait a year to make the change to give themselves more time to educate workers about the extension, while others already have acted.

The federal government, for example, revised its flexible spending account, giving workers until March 15, 2006, to spend dollars set aside for 2005 medical expenses.

But not all employers are on board. Some may decide it's not worth the potential confusion and administrative complications, benefits consultants said.

In a small number of cases, companies may be reluctant to give workers more time to spend down the account because that means fewer forfeited dollars. Companies typically use that money for benefits or administrative expenses, experts said.

Still, the majority of employers eventually are likely to extend the deadline. It's a way to give another perk to workers, and may even encourage more employees to participate in these tax-friendly accounts that never have quite caught on. And companies themselves can save money because they don't have to pay payroll taxes on income employees contribute to the accounts.

Flexible spending accounts have been around for more than two decades, yet only 15 percent to 20 percent of eligible workers use these accounts to pay medical expenses, benefits experts said.

"Probably as much as anything it's a lack of understanding how the programs operate and concern that they might not use it correctly and lose money," said Rich Stover, a principal with Buck Consultants in Secaucus, N.J.

Generally, workers decide during open enrollment periods how much money they want to set aside in the account for medical expenses for the coming year. Workers often are offered a separate flexible spending account to pay for dependent care.

Money for flexible accounts is deducted from workers' paychecks throughout the year before any taxes are paid on it. Workers will never have to pay federal taxes on the money if it's used for qualified expenses. (Virtually all states, including Maryland, don't tax this money, either, benefits experts said.)

Under federal regulations, workers can set aside up to $5,000 a year for dependent care. Employers, though, set the cap on flexible accounts for health care, usually no more than $5,000 a year, said Scott Halstead, chief executive of WageWorks, a San Mateo, Calif., company that administers flexible accounts for employers.

Over the course of the year, for example, workers can dip into the health care account to pay for co-payments, deductibles, dental and vision care and over-the-counter drugs.

For workers, of course, the big drawback is that any money left over at the end of the plan year, often Dec. 31, is lost. The average forfeiture is about $100, said Jeff Munn, senior health care consultant with Hewitt Associates' office in Falls Church, Va.

Many blame this "use-it-or-lose-it" rule as the reason employees shy from flexible accounts, even though the accounts can cut workers' taxes.

"They don't like use-or-lose. They would rather pay with after-tax money than turn money back in," said Helen Darling, president of the National Business Group on Health, an organization of large employers.

But paying medical bills with pretax dollars can mean a savings of up to 30 percent or 40 percent, depending on a person's tax bracket and the state he lives in, Halstead said.

Benefits experts say companies are less likely to rush to extend the deadline on flexible accounts for dependent care.

"The demand for an extension is less on the dependent-care side. People generally know what they are spending on dependent care month to month," said Hewitt's Munn.

Even if employers extend the deadline for health care expenses, it could get a little complicated.

Generally, employers will require that workers first use up any money carried over from the previous year to cover medical bills incurred during the extension period. One problem that could occur, experts said, is that a worker uses up her 2005 dollars in early 2006 and then discovers an unpaid medical bill from last year. The worker wouldn't be able to use 2006 dollars to pay the old bill.

That situation, though, could be avoided if employers set up a system that permits leeway in certain cases, said WageWorks' Halstead.

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