U.S. Office of Personnel Management - Ensuring the Federal Government has an effective civilian workforce

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Flexible Spending Accounts

Abby L. Block
Assistant Director for Insurance Programs

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FEDFLEX BENEFITS PLAN

• Needed to qualify as a cafeteria plan under Internal Revenue Service Code (IRC) section 125
• Was created before premium conversion implementation; now being revised
• It will include:
  • A Health Care Flexible Spending Account (FSA)
  • A Dependent Care FSA
    

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WHY FLEXIBLE SPENDING ACCOUNTS?

• To remain competitive with private sector for recruitment and retention
• 87% of employers surveyed offer some form of flex benefits
• We are just coming on board

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Definition

• Cafeteria Plan:

  A plan meeting requirements of IRC section 125 that allows employee choice between pre-tax benefits and cash.

• Under FedFlex:
  • 3Allotment of salary
  • 3Deducted from gross salary for tax purposes, not pension

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Examples

• Paying health insurance premiums with before tax dollars (Premium Conversion)
• Health Care FSA
• Dependent Care FSA

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Types of FSAs

• Health Care FSA
  • For health plan deductibles, copayments, coinsurance and non-covered but tax-deductible expenses, e.g., non-covered dental services; lasik surgery
• Dependent Care FSA
  • Eligible children and adults
  • Expense must be necessary to allow employee to work

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Cafeteria Plan -- Sec.125 Rules
What Benefits Could Be Included?

• Medical Benefits
• Vision Benefits
• Prescription Drug Plan
• Dental Benefits
• Group Term Life
• Dependent Care Assistance Plans
• Long-Term and Short-Term Disability
• Accidental Death and Dismemberment Insurance
• Must include CASH option

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Congressional Interest

• Representative Weldon held recent hearing on cafeteria plans
• Explored the full range of options available
• Appropriations Committee supported extension of FSAs to the federal workforce and directed OPM to report on implementation efforts

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Where are we right now?

• Premium Conversion
  • Positive declination

• Flexible Spending Accounts
  • Positive election each year
  • Health Care FSA
  • Dependent Care FSA

Premium Conversion Plan

• Concept:
  • A cafeteria benefit plan that allows an employee to pay premiums for health care benefits with pre-tax dollars
• Advantage:
  • Employee take-home pay is greater than for same premium paid on a traditional after-tax basis
  • Agency saves money (FICA)
  • No budget impact

Premium Conversion
How It Works

• Mutual Agreement

  • Employee agrees to reduce pay by allotment

  • Agency agrees to contribute exact amount reduced from the employee’s pay

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Flexible Spending Accounts

• Concept:
  • Use pre-tax dollars to pay for:
    • Deductible medical expenses not covered by employer’s plan
    • Eligible dependent care costs
• Advantages:
  • Employee saves money on taxes
  • Government can compete better with private sector for employees

Flexible Spending Accounts
How They Work

• Mutual Agreement
  • Employee chooses to reduce pay for the next year by a selected amount through allotment
  • Agency agrees to put that amount into the employee’s FSA
  • Medical and dependent care accounts are separate
  • No changes without a qualifying life event (QLE)

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Flexible Spending Accounts
How They Work

ADMINISTRATION

• Employer self-administers
  • Seldom done

• Third-party administrator (TPA)
  • One TPA typical

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Flexible Spending Accounts
How They Work

• Claims Reimbursement
  • Employee submits claim against FSA account
  • Valid claims are reimbursed on pre-tax basis
  • Amounts not claimed at end of year are forfeited
    • Usually 90 to 180 days after end of year to submit claims
    • "Use it or lose it" provision; President’s budget recommends $500 rollover

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FSA Start-Up Funding

• Typically, with FSAs, the employer is fully liable

• With FedFlex, the TPA will take on a significant amount of responsibility
  • Employer liability
  • Education/communication
  • Employee elections

• There will be payroll office interface

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Flexible Spending Accounts
TPA Sources of Funds

• Forfeitures
  • Money not used for allowable expenses by end of year

• Interest
  • Money that "sits" in account draws interest

• Charge per account

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Flexible Spending Accounts

• No new legislation required

• Can be done administratively under current law

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Flexible Spending Accounts
Next Steps: OPM

• Modify FedFlex Plan Document
• Issue No Cost Request For Proposal
• Select TPA
• Issue Regulations
• Start-up goal:Mid-2003