By Teresa McUsic

Interested in saving $400 with little effort?

How about $1,000?

Those are the average amounts workers could save if they signed up for their health or dependent flexible spending account during this open enrollment period.
“It’s a great benefit,” said Susan Greenwood, a Fort Worth CPA. “I recommend it for all my clients, if it’s available.”

Flexible spending accounts turn 30 next year. Established by federal tax law to help offset the rising costs of healthcare and dependent care, the accounts are set up by employers to take an agreed-upon amount out of the employee’s regular paycheck for healthcare costs not covered by the insurance provider or for daycare, pre-school and summer camps for children under 12 and home healthcare for disabled dependents.

But even though the FSA is widely offered, few of us sign up.

A recent study by benefit consultants Hewitt Associates showed that more than 96 percent of large companies offered FSAs, but only one quarter of employees participated in the healthcare accounts, and just 3 percent use the dependent care accounts.

A similar study of Texas companies by Mercer Health and Benefits found 85 percent of all employers with more than 500 employees surveyed offered healthcare spending accounts, but just 18 percent of employees participated. Similarly, while 81 percent of large Texas companies surveyed offered dependent care FSAs, only 5 percent of employees used the benefit.

Participation nationally was slightly higher in companies with less than 500 employees in the Mercer study, with more than a third of employees taking out a healthcare account and 16 percent taking a dependent care FSA, but only around 30 percent of companies that size offered the benefit.

Why such low participation numbers?

“The two biggest barriers are lack of understanding and fear of the ‘use it or lose it’ aspect of FSAs,” said Mark Chronister, principal with Mercer in Dallas. “Enrollment should be higher.”

By law, money collected in an FSA must be used in the benefit year or be forfeited by the employee to their company. In recent years, the Internal Revenue Service has tried to make these accounts more accessible by adding over-the-counter drugs costs as one of the acceptable uses for the account and by adding a 2 ½ month extension to the timeline, making FSA money available until March 15 of the following year. But Chronister said only about half the companies surveyed have adapted the extension ruling.

Keeping good records and on top of filing deadlines with your company’s FSA administrator is vital to the process, said Greenwood.

“I had one client who lost $700 in her FSA,” she said. “She had the substantiation, but didn’t turn it in on time. If you’re not going to take the time to follow the rules, there’s no reason to do it.”

Most people do not leave that much in their accounts, however. According to the Mercer survey, employees forfeited just 4 percent of the funds in their healthcare account and 1 percent of contributions to their dependent care accounts last year.
The fear of losing money shouldn’t stop people from taking out an FSA, said Sarah Taylor, head of open enrollment at Hewitt.

“Even if you forfeited money you would still probably be better off because of the tax benefits,” she said. “And most don’t forfeit any money at all.”

Seeing the big picture of the tax benefits can be difficult for some workers because the savings happens in small increments each time you are paid, Taylor said. But those amounts can be substantial over a year’s time, she added.

Seeing how much you can save is easy to calculate.

Mercer said the average healthcare account in 2006 had $1,261. Since that amount is taken out before federal taxes, Social Security and Medicare taxes are deducted from your paycheck, you don’t pay those taxes.

So, for someone in the 25 percent tax rate, multiply $1,261 by .25 and you get $315. Then multiply $1,261 by .0765 (for Social Security and Medicare) and you get $96. Add the two figures together and you save $411 with an FSA in that amount.

You can often save even more with a dependent FSA, since you have a closer idea of what daycare costs and the dollar figures are usually higher. The average contribution to a dependent care account in 2006 was $3,122. Using the same formula above, you could save more than $1,000 in taxes.

Chronister estimates that as many as 35 percent of employees could take advantage of the FSA, but added that they are not for everyone.

“If you have fairly limited healthcare expenses, you don’t need one,” he said. “Half of all workers don’t even file a claim on their health insurance in any given year.”

But if you know you’ve got braces for your kids or eye glasses for yourself in the future, or have a condition with regular costs not covered by your insurance, the FSA is like getting a 30 percent off coupon on your health costs or dependent care.

“People should look closely at the FSA,’ Taylor said. “As employers continue to cut back on health benefits, it’s a wonderful way for people to compensate for their reduced benefits.”