Don’t get tripped up by flex spending accounts
As year-end approaches, benefits provider says handling of fund balances, claims processing depends on type of account.
As we near the end of 2017, those who opted into a flexible spending account (FSA) for the year will find notices in the mailbox about their remaining balance — and might be wondering what to do next.
Brian McLane, director of product and program development at Grand Rapids-based Priority Health, said that all depends on what type of FSA an employee opted into during the previous open enrollment period.
An FSA is designed to allow enrollees to set aside pre-tax dollars to pay for qualified expenses not covered by their health insurance plan.
Priority Health administers two FSA options: health expense and dependent care expense accounts. Depending on what the member employer opts into, sometimes the two can be paired.
Alternatively, the insurer offers a limited FSA to pair with a high-deductible health plan and a health savings account. It can be used to pay for dental and vision expenses before the deductible is met and for any qualified medical expense thereafter.
McLane said employees may notice a slight variation on their FSA statements this year, whether the account has a third party or health plan vendor as the administrator.
The changes address the “use it or lose it” rule.
“There are a couple changes that came out with FSAs two years ago,” McLane said. “The law does allow a couple carry-over categories. The first one gets you three extra months. When an employer makes a decision to go that route, the employees get January, February and March of the next year to use up their funds. If they have $1,000, and they use up $800, they have three months left to use the funds up.
“Another option is they can use those three months to submit a claim. Say they went to the hospital just before Christmas, then they would have until February or March to submit their claim.”
A third option allows $500 to be carried over into the next cycle. It’s up to the employer which option to offer.
“That’s determined when plan documents are developed,” he said. “The FSA would have to be decided on ahead of time.”
McLane said overall, only about 4 percent to 5 percent of employees on Priority Health plans have opted into the FSAs, either because they have switched to HSAs (27 percent of those eligible) or because they don’t need or want to plan ahead for medical expenses.
“Most people under plan,” he said. “The thought of having to pay out $50 to $100 per paycheck is hard, even though they’re paying it out later if they don’t set it aside.”
Those who do use FSAs generally don’t put too much into them, he said.
“I think the amount of unused funds is probably smaller than most people would think,” McLane said. “The tools for planning FSAs are pretty good. At the beginning of open enrollment, people can decide how much to put into their flex account. But traditionally, people are even too conservative. For the most part, FSAs are underfunded.”
In the cases where funds are left over, McLane said that sometimes employers who own the funds take the total amount left over, divide it by the number of participants and redistribute the funds.
Other employers take unused funds to pay for the operating costs associated with running the FSAs.
McLane said in the past, FSA participants facing a ticking clock and a positive balance would go to the drugstore and buy Band-Aids and vitamins. These days, the list of qualified medical expenses limits that option.
“If it is a prescription, you’re OK,” he said. “If you went to the grocery store and wanted to buy multivitamins, if you got audited, you would need that prescription in the background to prove it was a qualified medical expense. As long as there’s a prescription, there’s no problem there.”
Other qualified medical expenses include dental expenses, including routine care, braces and dentures; flu shots; chiropractic treatments; and eye care, including exams, glasses, contacts and contact lens supplies.
The latter is a popular choice for spending down an FSA fund balance or health plan deductible, McLane said.
“People may move things up they would get a (while) from now, like if they are due to get glasses in four months and they decide to get them now,” he said. “The most common is glasses or a dental procedure. I might go ahead and get new glasses. You’re paying most of those out of pocket anyway.”
As open enrollment for next year approaches, McLane said, it’s important for people to re-evaluate their FSA options.
“People need to have a realistic perspective on what should go into FSA. Understand what your employer’s rules on carryover are. Are there three months? Or is there a $500 carryover?” he said.
“Every year, take a fresh look. Every year, have a realistic view, and every year, understand what your employer’s rules are.”