Deep Dive Into FSA Behavior Finds Knowledge Gaps That May Reduce Effectiveness

Deep dive into FSA behavior finds knowledge gaps that may reduce  effectiveness | BenefitsPRO

Source: BenefitsPRO, by Alan Goforth

Flexible spending accounts can be a useful way for workers to stretch health-care spending dollars further than they otherwise could. However, little is known about how workers use — or don’t use — FSAs.

In response, the Employee Benefit Research Institute established the FSA Database to shine a light on this under-researched employee benefit. Analysis of this database revealed several things:

Contributions. In 2020, workers contributed an average of $1,265 to their FSAs. Only 7.7 percent of accountholders had the benefit of also receiving an employer contribution. Among those who did, the average employer contribution was $299.

Only 3.6 percent of workers contributed the statutory maximum, which was $2,750 for 2020. Inertia may be a powerful force in setting contribution amounts, because 10.5 percent of workers contributed the statutory maximum for 2019 ($2,700).

Distributions. The vast majority of accountholders took a distribution in 2020. Fully 89 percent did, similar to the share of accountholders taking a distribution in 2019. Of those who took a distribution, the average amount withdrawn was $1,287, nearly identical to the average of $1,279 observed in 2019.

That distributions are closely tied to contributions is not surprising. There is a strong incentive for FSA accountholders to spend the entirety of their balances. Unlike with health savings accounts, there is a limit to how much accountholders can roll over each year — if they can at all — and so accountholders generally cannot withdraw significantly more than they contribute.

Limited-purpose FSAs. Workers enrolled in an HSA are ineligible to contribute to regular health-care FSAs, but they can enroll in limited-purpose FSAs to save specifically for vision and dental expenses. Because these accounts specifically are intended for defraying dental and vision expenses, accountholders tend to use them differently than standard health- care FSAs.

Notably, the average contribution was significantly smaller than the average contribution to a standard health-care FSA — $859, compared with $1,259. This may reflect the more limited scope of qualified medical expenditures that are eligible for reimbursement compared with a regular health-care FSA.

Three different FSA types. “Use-it-or-lose-it” FSAs are self-explanatory; accountholders forfeit any money remaining at the end of the plan year to their employer. FSAs with a rollover feature, on the other hand, allow the accountholder to roll over funds to the next year, up to a statutorily defined amount.

“Grace-period” FSAs allow workers to take distributions up to two and a half months after the end of the plan year. All three types of FSAs had similar average contribution and distributions. Only about $150 separated the average contribution of a “use-it-or-lose-it” FSA and the average contribution of a rollover FSA.

Similarly, the three FSA types saw similar average distributions; about $120 separated the smallest average distribution, seen in “use-it-or-lose-it” FSAs, from the largest average distribution, seen in FSAs with a grace period.

Age and FSA attributes. FSA contributions and distributions both increase with age. Older accountholders are more likely to incur health-care expenditures than their younger counterparts and, because of higher salaries on average, may be better positioned to divert more discretionary dollars to FSAs as well.

Younger accountholders contributed relatively little to their FSAs in 2020, contributing an average of $499. Generally, as age increased, so did average contribution, with one notable exception: The 45 to 54 age group contributed the most, diverting on average of $1,430 to their FSA. The oldest workers in EBRI’s FSA Database contributed the second-highest amount, chipping in an average of $1,427.

“Developing a better understanding of accountholder behavior is critical in fostering optimal usage of FSAs and ultimately can improve workers’ financial well-being,” the report concluded.

“While it is encouraging that older workers stretched their health-care dollars further with higher average contributions and more frequent distributions, younger workers had relatively small contributions, and little more than half took a distribution from their FSA. This is perhaps indicative of a knowledge gap and may hinder a worker’s financial wellbeing.”

Treasury Modifies FSA Use-or-Lose Rule

piggyBankFSAThe Dept. of Treasury and the IRS issued a notice modifying the longstanding “use-or-lose” rule for health flexible spending arrangements (FSAs). The updated guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year. Some plan sponsors may be eligible to adopt a carryover provision as early as plan year 2013. In addition, there are existing options for plan sponsors to allow employees a grace period after the end of the plan year. However, a health FSA cannot have both a carryover and a grace period; it can have one or the other or neither.

Jeremy Miller, president and founder of said, “Changes to the use it or lose it rule present a significant growth opportunity for flexible spending accounts. The use it or lose it provision was one reason why people shied away from FSAs. This change, coupled with the major pre-tax savings on out-of-pocket expenses, should encourage many new participants to take advantage of FSAs.”

The policy change is in response to public comments. An overwhelming majority of feedback was from individuals, employers, and other organizations that wanted the health FSA use-or-lose rule to be modified. With the use-or-lose rule, any account balances at the end of the year are forfeited. Those commenting said it is difficult for employees to predict needs for medical expenditures; FSAs need to be accessible to employees of all income levels; and there should be incentives to minimize unnecessary spending at the end of the year.

Bill Would Expand HSAs & FSAs

Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) and Senator Marco Rubio (R-Fla.) introduced the Family and Retirement Health Investment Act of 2013 to strengthen and expand health savings accounts (HSAs) and flexible spending arrangements (FSAs). Companion legislation was introduced in the House by U.S. Rep. Erik Paulsen (R-Minn.).

Hatch, whose Committee has jurisdiction over health care policy said, “Over the years, these plans have grown in popularity, and it’s well past time Congress act to improve them. Streamlining these popular health care products…will provide millions of families, workers, and retirees the opportunity to put away tax-free savings to pay for their personal medical costs. It’s smart policy to increase access to quality and affordable health care for consumers at an affordable price and I hope to see this bill enacted into law.”

The legislation would do the following:
• Allow a husband and wife to make catch-up contributions to the same HSA.
• Remove the onerous new restrictions on the use of HSA and FSA dollars for the purchase of over-the-counter drugs.
• Clarify the use of prescription drugs as preventive care that will not be subject to an HSA-eligible plan deductible.
• Reauthorize the use of Medicaid health opportunity accounts.
• Promote wellness by expanding the definition of qualified medical expenses to encourage more exercise and better nutrition.
• Allow seniors enrolled in Medicare Part A to continue contributing to their HSAs.
• Allow for the purchase of low-premium health insurance and long-term care insurance with HSA dollars.

Last Updated 06/29/2022

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