An FSA gives employees a systematic way to set money aside, through pre-tax payroll deductions, to pay for eligible health care expenses not covered by their company's health plan. They can use the money to pay for prescription co-payments, contact lenses, dental care, laser eye surgery and other items their employer specifies as eligible within Internal Revenue Service guidelines.
Employees decide how much to contribute for the year. The employee's annual contribution, divided by the number of pay periods per year, is the amount automatically deducted from each paycheck and deposited to the FSA.
A win-win way to save
An FSA offers tax savings and other advantages for both employers and employees.
The plans allow employees to:
* Pay less in income taxes, since they contribute pre-tax dollars to their FSA
* Put as much money into their FSA as needed -- often $5,000 or more -- as long as the amount doesn't exceed the limit set by the employer within IRS guidelines
* Have FSA contributions set aside automatically, usually through payroll deductions, making the FSA a simple, systematic way to save for health care expenses
* Spend the entire amount of their annual FSA contribution at any point during the plan year, even before the money is in the account
The plans allow employers to:
* Reduce payroll taxes, since employees' contributions are pre-tax dollars
* Specify the minimum and maximum amounts employees can contribute to an FSA, within the limits set by the IRS
* Select, from an IRS-approved list of FSA-eligible items, those items for which their employees can receive FSA reimbursement
* Be relieved of the administrative details associated with managing accounts, if the insurance carrier manages the FSA
The only objection to FSAs has been the "use it or lose it" provision. Employees must aim for accuracy in estimating their annual contribution, because any money remaining in the FSA at the end of the plan year is returned to the employer.
Converting users to consumers
Because employees spend their own money for FSA-eligible medical services, they become more cost-conscious consumers of health care. They begin to shop for health care just as they do for other goods and services -- by looking at the options available, comparing costs and then choosing the service or product and price they prefer.
To make it quick and simple for employees to access and manage their FSA dollars, some insurance carriers provide a stored-value card for use at the point of service. The convenience and familiarity of swiping a card appeals to consumers and encourages them to participate in an FSA. Carriers that administer FSAs may also include secure, Web-based FSA status reports to help employees keep track of their account balance and manage their spending.
FSAs signal a growing convergence of health care management and financial management that leads employees to think of health care in a new way -- as active consumers, not passive users. This new way of thinking can help employees -- and their employers -- reduce costs and improve their bottom line.
ALAN GUZZINO is president of Humana's Atlanta, North Carolina and South Carolina market health plan operations and is responsible for the management, strategic planning and growth of those markets. Guzzino, an eight-year veteran of Humana, serves on the board of the Georgia Association of Health Plans. Reach him by e-mail at firstname.lastname@example.org. ROBERT S. WOLFKIEL is vice president of sales for Humana's Atlanta market and is responsible for managing and directing the sales initiatives, enrollment process and profitability of Humana's product portfolio within that market. Wolfkiel, although new to Humana, has more than 14 years of health care industry experience. Reach him by e-mail at email@example.com.