New Rules Allow Leftover Funds To Pay for Health Care Expenses in New Year
WASHINGTON, Aug. 10 /PRNewswire-FirstCall/ -- Half of U.S. employers plan
to allow employees to take advantage of new federal tax rules that permit them
to carry over unused flexible health care spending accounts for two and a half
months into the new year, according to a survey released today by the Deloitte
Center for Health Solutions and the ERISA Industry Committee.
However, the survey of 318 employers found that only 34 percent of
respondents plan to extend the grace period to allow participants in both the
health care and dependent care flexible spending accounts (FSA) to carry over
unused money.
"Employers, policy makers and employees have been complaining for years
that the use-it-or-lose-it rule discourages employees from contributing to
FSAs and encourages those who do contribute to make wasteful or frivolous
expenditures at the end of the year," said Martha Priddy Patterson, director
of national employee benefits policy at Deloitte. "But many employers think
the grace period may not be the answer. Half of the participants in our
survey either do not plan to offer the grace period at all or are undecided."
Ninety-seven percent of the companies surveyed offer both a health and
dependent care FSA. Employers use FSAs to give employees the opportunity to
set aside pre-tax money to fund anticipated health and dependent care -- such
as child care -- expenses for a year.
In May, the Treasury Department and Internal Revenue Service issued
guidance permitting (but not requiring) employers to amend plans to give
health and dependent care FSA participants a grace period of up to two and a
half months to incur eligible expenses that can be paid from the previous
year's salary contributions. The grace period is designed to provide some
relief from the use-it-or-lose-it rule, which requires employees to forfeit
any money remaining in their FSAs at the end of the plan year.
Dependent Care FSAs: Employers planning to not offer the grace period to
dependent care participants cited several reasons for their decision,
including:
-- 70 percent of respondents said dependent care expenses are more
predictable than health expenses and so the grace period is not needed
to prevent forfeitures.
-- 50 percent said they had no prior problems with forfeitures.
-- 9 percent said they had concerns about explaining the grace period to
participants.
Additionally, 67 percent said they were concerned the grace period would
cause inadvertent tax problems for dependent care FSA participants. A
participant in a dependent care FSA with a grace period could exceed the
$5,000 annual limit on tax-free reimbursements, resulting in additional
federal income and employment tax liability. Another 54 percent cited the
concern that the grace period also could create Form W-2 reporting problems
for employers. IRS officials have said employers will have to report
participants' actual reimbursements from dependent care FSAs with grace
periods. But dependent care FSA participants usually can file claims for the
previous year until well after the January 31 deadline for issuing Form W-2.
No grace period: Employers not extending the grace period to either health
or dependent care FSA participants offered a variety of reasons for not doing
so, including:
-- 67 percent of those not offering the grace period were concerned about
tracking account balances for two separate plan years simultaneously.
-- 58 percent were concerned about coordinating the grace period with
their run-out periods.
-- 49 percent said they did not feel the grace period was needed because
forfeitures had not been a significant problem for FSA participants.
-- 42 percent cited difficulties in explaining the grace period to
participants.
The survey also asked respondents to specify other reasons for not
offering the grace period to health or dependent care FSA participants.
Several respondents said they were planning to implement consumer-driven
health plans with health savings accounts (HSAs) in 2006, and individuals
participating in the health FSA this year would not be eligible to fund HSAs
during the grace period. Others cited various administrative problems, and
some expressed doubts about whether the grace period would change employee
behavior.
Many Still Undecided: The incidence of employers offering the grace period
could increase significantly in the future because just over a quarter of
surveyed employers said they were undecided about the grace period, and:
-- 43 percent of these employers said they are waiting for more Treasury
guidance on the grace period.
-- 24 percent said they are waiting for information about other employers'
experiences.
-- 25 percent indicated employee requests for the grace period would be
relevant to their decisions.
When Available: A large majority of those offering the grace periods will
make them available this year, with large majority offering them for the
maximum amount of time:
-- 73 percent of those offering just the health FSA grace period will make
it available in 2005, and 21 percent will make it available in 2006.
-- 85 percent offering the health FSA grace period will make it available
for two and a half months, with 9 percent offering it for two months
and 4 percent for one month.
-- 81 percent offering the dependent care FSA grace period will make it
available in 2005, and 17 percent will make it available in 2006.
-- 88 percent offering the dependent care FSA grace period will make it
available for two and half months, while 8 percent will make it
available for two months and 2 percent will make it available for one
month.
The Deloitte/ERIC 2005 FSA Grace Period Survey was conducted from July 18
through July 26, 2005. A total of 318 employers from the private sector and
the government participated in the Internet-based survey. Sixty-one percent
of respondents have at least 2,000 employees, and 19 percent have more than
20,000 employees.
About the Deloitte Center for Health Solutions
The Deloitte Center for Health Solutions, located in Washington, D.C., is
part of Deloitte & Touche USA, LLP. The Center is led by Independent Chairman
Tommy Thompson, former Secretary of Health and Human Services and former
Governor of Wisconsin.
The Center is focused on delivering research and solution development for
our nation's most pressing health care and public health related challenges,
focusing on prevention and wellness programs, the uninsured, adoption of
health information technology, Medicare and Medicaid.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss
Verein, its member firms and their respective subsidiaries and affiliates. As
a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its
member firms has any liability for each other's acts or omissions. Each of the
member firms is a separate and independent legal entity operating under the
names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu" or other
related names. Services are provided by the member firms or their subsidiaries
or affiliates and not by the Deloitte Touche Tohmatsu Verein.
Deloitte & Touche USA LLP is the US member firm of Deloitte Touche
Tohmatsu. In the US, services are provided by the subsidiaries of Deloitte &
Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte
Financial Advisory Services LLP, Deloitte Tax LLP and their subsidiaries), and
not by Deloitte & Touche USA LLP.
About ERIC
The ERISA Industry Committee (ERIC) is a nonprofit association committed
to the advancement of the employee benefit plans of America's major employers.
ERIC's members' plans are the benchmarks against which industry, third-party
providers, consultants, and policy makers measure the design and effectiveness
of employee benefit, incentive, and compensation plans. ERIC's members are
engaged daily with meeting the demands of both their enterprise and the needs
of employees. ERIC, therefore, is vitally concerned with proposals affecting
its members' ability to provide employee benefits, incentive, and compensation
plans, their costs and effectiveness, and the role of those plans in the
American economy.
SOURCE Deloitte
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CONTACT:
Britton McMullian Josey, National Public
Relations, Deloitte Services LP, +1-404-220-1334,
bmcmullian@deloitte.com
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