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Workers ignore tax-saving FSAs

By Kay Bell ·
Tuesday, September 27, 2011
Posted: 3 pm ET

Employer-provided benefits that can save workers tax dollars are one of the biggest costs to the U.S. Treasury.

But apparently Uncle Sam's costs could be higher if more employees took advantage of additional workplace offerings.

Take flexible spending accounts, or FSAs, for example. These are a great way to stash money before taxes are taken out. That means that less of your paycheck is subject to the Internal Revenue Service's sticky fingers.

Then you get to use that untaxed money to pay for things such as child care or medical costs that aren't covered by your medical insurance, another tax saving for you.

However, the American Payroll Association has found that employees aren't using flexible spending accounts.

According to the organization's 2011 version of its annual "Getting Paid In America," only 12 percent of employees contribute $2,500 or more to their company's FSA.

That result is surprising, says the payroll group, considering data from the Kaiser Family Foundation and the Health Research and Educational Trust indicating that workers on average in 2010 paid nearly $4,000 toward the cost of family health coverage.

The payroll survey asked, "Did you contribute more than $2,500 last year to your medical flexible spending account?"

Only 12 percent said yes. Another 39 percent contributed to an FSA, but less than $2,500. Then there was the 46 percent didn't participate in an FSA at all.

"While health care costs are a big concern for employees and their families, the survey results clearly show they aren't taking full advantage of FSA plans," said Dan Maddux, executive director of the American Payroll Association. "Employers should encourage employees to take advantage of these and other pretax, voluntary payroll deductions to ease the burden of these anticipated expenses."

There's one minimally positive note from the survey and the low FSA participation.This year the poll used $2,500 as the contribution cutoff. Currently, there's no statutory limit on the amount a worker can put into a medical FSA, but most companies use a $5,000 maximum.

Come 2013, there will be a new lower limit on contributions to the medical accounts. You guessed it: $2,500.

Since most people aren't maxing out their FSAs now, that upcoming $2,500 limit won't be a major problem in a couple of years.

Does your company offer flexible spending accounts, sometimes also called flexible savings accounts? Do you participate? Do you plan to open an FSA this benefits enrollment season? If not, why not? I'd love to hear why you aren't taking advantage of this tax break.

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September 28, 2011 at 11:54 am

I think the government would like citizens to perceive the FSA option as a privilege. So much of leadership and administration of programs is about shaping the perception of a good deal.

"I can use part of my income, pre-tax, to pay for medical expenses? Thanks, big bro!"

Whether my dollars are pre- vs post-tax should not be considered. The tax system should be modified such that taxation happens at the point of consumption so ALL of my income goes into my bank account for me to spend as I need and want. No need to worry about whether I've budgeted enough in my FSA to cover health costs pre-tax, or whether I've budgeted too much and any tax savings will be lost at the end of the year. The costs of administering the program would be eliminated and tax revenues would increase.

Whether health-care related goods/services should be taxed under such a system is beyond the scope of this comment.

Rachel Roberts
September 28, 2011 at 11:46 am

I am not sure you are using appropriate information from the Kaiser Foundation. The $4000 number mentioned is probably the average cost an employee pays in medical insurance premiums. Premiums are not reimbursed through an FSA. I would think most people don't accumulate more than $2500 of medical expenses a year therefore there is no reason to set aside more than $2500.

September 28, 2011 at 11:27 am

After reading the comments as to why they contribute less than $2500 to their FSA, I understand why - they all appear to be younger and in good health. As I get older, my medical bills get higher & I have to take more medicines. I would much rather reduce my taxes than give Uncle Sam any extra to squander away. The truly wise choice is to only contribute what you believe you will spend out of pocket during the year. To do any more or less only hurts your own wallet. Good planning & a crystal ball work wonders here!

September 28, 2011 at 10:06 am

My rx costs a whopping $110/ year. I factored in the occasional co-pay for the dentist or doc, so I went ahead an assumed I may use $300 for the whole year. Why in my right mind would I tie up thousands of dollars of my own money??

Jeff G
September 28, 2011 at 8:38 am

Besides all of the paperwork headaches that Joe L mentioned, the biggest downside is that if you don't spend all of the money, you lose it! Unless you have regular prescriptions, predicting the cost of healthcare is extremely difficult. Some years, cost may be on a couple hundred dollars, others it's thousands. I wish the government would make it like a dedicated IRA where you wouldn't lose the money but could only use for healthcare. You could put as much as you want, you keep it for life and upon your death, it goes to the government, not your estate.

September 28, 2011 at 8:10 am

In theory the FSA is a great option, but in reality regulations have made it less useful. We contributed less to our FSA this year because OTC medical products were removed from the allowable expense list. It's not practical to get a prescription every time we need to buy some Aleve or cold medicine. Rather than max out our contributions and lose all of our unused money at the end of the year we did the financially prudent thing and put less into the account.

September 28, 2011 at 7:39 am

We are a family of 6 and we do less than $2,500 per year because our expenses are less than $2500 per year, even after the now not allowed end of year OTC stock up with excess funds.

Joe L
September 28, 2011 at 1:38 am

I stopped contributing to my employer's FSA for childcare because it was a PIA! After copying and collating stacks of daycare receipts and sending them to the processing company, it would take 4-6 weeks for a response (usually a denial for some lame reason. Plus another 7-10 days after the expenses were finally approved --this is MY money taken from MY paycheck.
It was NOT worth the "tax savings" for the level of aggravation it caused. Deducting the daycare expense on my 1040 was WAY easier.