Michael Scott, the lead character from NBC's hit show The Office, once said that the fifth style of conflict is a win win win scenario, where everyone wins. Companies and employees often feel the tension between the traditional win/lose mentality where benefit changes are good for one group and terrible for the other.
While the world's best boss may not get everything right, his "win win win" is a great way to describe the IRS's recent $500 Health FSA Carryover provision announcement. We discussed the carryover provision in detail in a previous post, and have an on line presentation you can view for more details. At a high level, employers who elect the carryover provision will allow their employees to carryover $500 in Medical FSA elections from one plan year to the next. This is great news for employees and employers!
Four Positives for Employees
1) Reduces Risk - Loss aversion is the term used to describe why losing $100 hurts more than gaining $100 feels good. Said another way, someone who loses $100 walking home will feel much more negative emotion than someone who finds $100 walking home will experience positive emotion. When choosing to make an FSA election employees must choose between the risk of forfeiting dollars vs the tax savings these types of accounts provide. When polled, more than half of employees who do not participate in an FSA indicate the risk of losing money is the main factor. By adding the $500 carryover, the IRS has made it possible for an employee to elect $500 with no risk of forfeiting thos dollars at the year end.
2) Budgeting Tool - FSAs provide a valuable mechanism for employees to budget for medical, dental, and vision expenses for themselves and their families. Taking time to look at prescriptions, doctor visits, glasses and dental work a family may need is in important part of the budgeting process and should occur each year when making an FSA election. Funds are withheld evenly over the entire plan year from the employee's paycheck and are available when needed.
3) Less Rush To Spend - The $500 carryover will decrease the amount of spending that typically occurs at the end of the year as employees rush to spend the remaining balance in their accounts. Now, employees can make purchases for items they need at the end of the year, like sunscreen, without needing to purchase large quantities of any items.
4) Tax Savings - Employees will also realize a tax savings between the high twenty to mid fourty percent range (Federal tax rate + State tax rate + FICA tax rate, currently 7.65%). An average employee electing just $500 will save approximately $150 in taxes and an employee electing $2,500 will save around $750.
Four Positives for Employers
1) Happier and Healthier Employees - FSAs can help employees budget for health care expenses, making it easier to get the medical care employees need when they need it. Peace of mind from having funds available and from not worrying about losing funds will create happier and healthier employees. All of this creates more productive employees who can do their jobs better and help their companies grow.
2) Higher Enrollment - Employees who are not afraid of losing money will be more likely to sign up for an Medical FSA. Some forecasts predict that employee participation rates may double simply through the addition of the carryover provision.
3) Avoiding Forfeitures - By adopting the $500 carryover, employers will be taking another step towards helping their employees keep hard earned money. Data from 2011 and 2012 shows that 85% of employees who forfeited dollars had a remaining balance of $500 or less. Simply by adding the carryover provision, forfeitures could be reduced to about 3% or all FSA participants. No one wants employees to lose money at the year end!
4) Greater Tax Savings - Employers do not pay FICA taxes (currently, 7.65%) on dollars run through an FSA. An average election of $1,300 generates a tax savings of $100 for the employer. Encouraging more participation in Medical FSAs will increase the employer's tax savings - in many cases causing the FSA benefit to fully pay for itself and generate additional savings for the employer.
The $500 carryover provision does create the infamous win win win scenario for employers and their employees. There is planning and communication that must be considered, but if rolled out effectively, this new FSA provision will make everyone's day better. If you would like help adding the carryover provision to your FSA plan or are interested in working with 24HourFlex please click on the button below. Feel free to leave comments as well in the section below this post - we look forward to hearing from you!