If you are in the business of selling, providing, or administering tax-advantaged health plans, you likely already understand the benefits of a flexible spending account (FSA). But for the millions of people who don’t, the benefits can seem rather unsubstantial. That’s why it is your job to articulate these benefits in a way that people can relate to.
Manuel Morales, VP of Sales at Ameriflex, talks about the benefits of FSAs on a daily basis.
If you ask Morales, “What is an FSA?”, he describes it in plain english as “a special account you put money into to pay for medical expenses. You don’t pay taxes on this money, meaning you’ll save an amount equal to the taxes you would have paid on the money you set aside.”
That’s when he typically sees eyes open and ears perk up. He can see their interest grow with each mention of the issues that actually matter to the potential buyer.
In this article we examine the three most common objections to FSAs and why they shouldn’t keep someone from opening one.
After years of selling consumer-driven health products, Manuel has heard plenty of objections to having an FSA. He says the three top objections he hears most often are:
According to Morales, the people who feel they can’t afford an FSA number in the thousands, “People think they cannot afford “another deduction” on their paycheck.”
But he says they’re thinking about it all wrong. “When you look at it from the point of view that it’s money being taken out of your paycheck rather than putting money back into your paycheck through lowering your taxable income, you’re costing yourself money in the long run.”
The truth is you can afford it.
When someone opens an FSA, they have to decide how much money they want to put into it throughout the year, up to the maximum contribution limit ($2,700 in 2019). Then, every pay-period they will have 1/26th of that amount (see Figure 1 above) taken out of their paycheck and put into the account (assuming they get paid bi-weekly).
But Morales says people get so focused on the few dollars that will be missing from each paycheck that they lose sight of the savings they get in the long run (see Figure 2 above). “The money you put into your FSA doesn’t count as income, so you are lowering your payroll taxes at the end of the year, and whatever amount you choose to put into an FSA, you get all of that money available to you at the beginning of the plan year so you could potentially be starting the year out $2,700 ahead!”
Another objection Morales says he hears frequently is that potential participants don’t plan on going to the doctor that year.
“People say they don’t need it because they are healthy.”
What someone plans on happening with their health and what actually happens are often two very different things. And one of the biggest misconceptions about tax-advantaged accounts is that they only pay for limited medical expenses, such as copays and deductibles. Not only can the money in an FSA be used to pay for medical deductibles, copays, prescription drugs, eyeglasses, dental visits, and eye exams, but it can also be used to purchase hundreds of over-the-counter items like Band-Aids, sunscreen, braces and wraps to prevent sports injuries, heating pads, ice-packs, contraceptives, contact solution, First-Aid supplies, cough suppressant; and any of the hundreds of other items found in the online.
Even if someone doesn’t plan on going to the doctor, they will have to purchase some of the items that are in their medicine cabinet right now.
And chances are a very large percentage of those items can be purchased tax-free with an FSA. If someone doesn’t plan on going to the doctor, they should still open an FSA and put a couple hundred dollars into it just to purchase any of the items listed above (and dozens more) tax-free.
This brings us to the third reason most people think they don’t need an FSA: The dreaded “Use it or lose it” rule.
Some estimates have put the average amount of money forfeited in an FSA each year to be between $50 and $100, but this amount is almost never higher than the amount of money a participant saves in payroll taxes by contributing to an FSA.
If someone put only $200 into an FSA to fill their medicine cabinet for the year, since the average person saves about 30% on the money they put into an FSA by lowering their taxable income, they would save about $60 by putting that $200 into their FSA. And if they put $500 into an FSA (we’ll explain below why they should be contributing at least $500), they will save approximately $150.
In short, while they failed to spend some of the money they set aside, they still likely saved more than that amount in taxes by using an FSA to purchase those over-the-counter items tax-free and the savings would increase as their contributions increase (up to $2700).
In 2013, the IRS began allowing companies to offer FSA rollover to their employees. Now, employees can rollover up to $500 from a previous year’s FSA into the following plan year, and they can still contribute the maximum amount to their FSA in that following plan year; up to $2,700 in 2019. In 2015, 60% of employers in the U.S. that offered healthcare FSAs to their employees also provided rollover according to the Society for Human Resource Management, and this number is growing.
The IRS also allows for a “grace period,” of typically 2.5 months, in which FSA participants can incur new expenses using the prior-year’s FSA funds. Employers are allowed to offer one of the two options, but not both.
Employers can, however pair one of the two options mentioned above with a 90-day runout period. This allows employees to submit manual claims for any expenses incurred within the plan year that has just ended and be reimbursed with the remaining funds in their FSA. This is a standard option and will be in place regardless of whether or not a grace period or rollover option are enacted; however, employers do have to choose to offer either the rollover or grace period options.
We’ve taken a look at the three most common reasons people think they don’t need an FSA and busted those myths. But are there any actual reasons why someone would not want to open an FSA? The answer is no… and yes..
The IRS will not allow someone to setup an FSA if they are already contributing to a Health Savings Account (HSA) in the current plan year, with which they are using pre-tax money to pay for eligible medical expenses.
The exception to this rule is that someone can open what’s called a Limited Purpose FSA (LPFSA) that only reimburses them for eligible dental and vision expenses, not medical expenses.
By now you should be pulling your hair out over the amount of money you could be saving potential customers with an FSA. But don’t worry, there’s still time to save them money in the next plan year. Don’t be surprised if you hear these objections, and know that there is a perfectly good response to each one!
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