# Presentation: 676970

## Flexible Spending AccountsAbby L. BlockAssistant Director for Insurance Programs

## FLEXIBLE

-   SPENDING
-     ACCOUNTS

## 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

## 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

**Notes:**
87% according to a 2001 Hay Benefits Report

## Definition		

- _Cafeteria Plan_:
- 	A plan meeting requirements of IRC section 125 that allows employee _choice between pre-tax benefits and cash_.
- 	Under FedFlex:
- Allotment of salary
- Deducted from gross salary for tax purposes, not pension

## Examples

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

## 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

## 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**_

## 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

## 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

## 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)

## Flexible Spending AccountsHow They Work

_**ADMINISTRATION**_
- Employer self-administers
- Seldom done
- Third-party administrator (TPA)
- One TPA typical

## 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

## 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

## 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

## Flexible Spending Accounts

- No new legislation required
- Can be done administratively under current law

## 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