Press release: Survey: Half of U.S. Employers Plan To Allow Employees To Carry Over Unused Flexible Health Care Spending Account Money

Issued by: Deloitte Date: Thursday, August 11, 2005

New Rules Allow Leftover Funds To Pay for Health Care Expenses in New Year WASHINGTON --  Half of U.S. employers plan to allow employees to take advantage of new federal tax rules that permit them to carry over unused flexible health care spending accounts for two and a half months into the new year, according to a survey released today by the Deloitte Center for Health Solutions and the ERISA Industry Committee. However, the survey of 318 employers found that only 34 percent of respondents plan to extend the grace period to allow participants in both the health care and dependent care flexible spending accounts (FSA) to carry over unused money. "Employers, policy makers and employees have been complaining for years that the use-it-or-lose-it rule discourages employees from contributing to FSAs and encourages those who do contribute to make wasteful or frivolous expenditures at the end of the year," said Martha Priddy Patterson, director of national employee benefits policy at Deloitte. "But many employers think the grace period may not be the answer. Half of the participants in our survey either do not plan to offer the grace period at all or are undecided." Ninety-seven percent of the companies surveyed offer both a health and dependent care FSA. Employers use FSAs to give employees the opportunity to set aside pre-tax money to fund anticipated health and dependent care -- such as child care -- expenses for a year. In May, the Treasury Department and Internal Revenue Service issued guidance permitting (but not requiring) employers to amend plans to give health and dependent care FSA participants a grace period of up to two and a half months to incur eligible expenses that can be paid from the previous year's salary contributions. The grace period is designed to provide some relief from the use-it-or-lose-it rule, which requires employees to forfeit any money remaining in their FSAs at the end of the plan year. Dependent Care FSAs: Employers planning to not offer the grace period to dependent care participants cited several reasons for their decision, including: 70 percent of respondents said dependent care expenses are more predictable than health expenses and so the grace period is not needed to prevent forfeitures. 50 percent said they had no prior problems with forfeitures. 9 percent said they had concerns about explaining the grace period to participants. Additionally, 67 percent said they were concerned the grace period would cause inadvertent tax problems for dependent care FSA participants. A participant in a dependent care FSA with a grace period could exceed the $5,000 annual limit on tax-free reimbursements, resulting in additional federal income and employment tax liability. Another 54 percent cited the concern that the grace period also could create Form W-2 reporting problems for employers. IRS officials have  said employers will have to report participants' actual reimbursements from dependent care FSAs with grace periods. But dependent care FSA participants usually can file claims for the previous year until well after the January 31 deadline for issuing Form W-2. No grace period: Employers not extending the grace period to either health or dependent care FSA participants offered a variety of reasons for not doing so, including: 67 percent of those not offering the grace period were concerned about tracking account balances for two separate plan years simultaneously. 58 percent were concerned about coordinating the grace period with their run-out periods. 49 percent said they did not feel the grace period was needed because forfeitures had not been a significant problem for FSA participants. 42 percent cited difficulties in explaining the grace period to participants. The survey also asked respondents to specify other reasons for not offering the grace period to health or dependent care FSA participants. Several respondents said they were planning to implement consumer-driven health plans with health savings accounts (HSAs) in 2006, and individuals participating in the health FSA this year would not be eligible to fund HSAs during the grace period. Others cited various administrative problems, and some expressed doubts about whether the grace period would change employee behavior. Many Still Undecided: The incidence of employers offering the grace period could increase significantly in the future because just over a quarter of surveyed employers said they were undecided about the grace period, and: 43 percent of these employers said they are waiting for more Treasury guidance on the grace period. 24 percent said they are waiting for information about other employers' experiences. 25 percent indicated employee requests for the grace period would be relevant to their decisions. When Available: A large majority of those offering the grace periods will make them available this year, with large majority offering them for the maximum amount of time: 73 percent of those offering just the health FSA grace period will make it available in 2005, and 21 percent will make it available in 2006. 85 percent offering the health FSA grace period will make it available for two and a half months, with 9 percent offering it for two months and 4 percent for one month. 81 percent offering the dependent care FSA grace period will make it available in 2005, and 17 percent will make it available in 2006. 88 percent offering the dependent care FSA grace period will make it available for two and half months, while 8 percent will make it available for two months and 2 percent will make it available for one month. The Deloitte/ERIC 2005 FSA Grace Period Survey was conducted from July 18 through July 26, 2005. A total of 318 employers from the private sector and the government participated in the Internet-based survey. Sixty-one percent of respondents have at least 2,000 employees, and 19 percent have more than 20,000 employees. About the Deloitte Center for Health Solutions The Deloitte Center for Health Solutions, located in Washington, D.C., is part of Deloitte & Touche USA, LLP. The Center is led by Independent Chairman Tommy Thompson, former Secretary of Health and Human Services and former Governor of Wisconsin. The Center is focused on delivering research and solution development for our nation's most pressing health care and public health related challenges, focusing on prevention and wellness programs, the uninsured, adoption of health information technology, Medicare and Medicaid. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu" or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein. Deloitte & Touche USA LLP is the US member firm of Deloitte Touche Tohmatsu. In the US, services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP and their subsidiaries), and not by Deloitte & Touche USA LLP. About ERIC The ERISA Industry Committee (ERIC) is a nonprofit association committed to the advancement of the employee benefit plans of America's major employers. ERIC's members' plans are the benchmarks against which industry, third-party providers, consultants, and policy makers measure the design and effectiveness of employee benefit, incentive, and compensation plans. ERIC's members are engaged daily with meeting the demands of both their enterprise and the needs of employees. ERIC, therefore, is vitally concerned with proposals affecting its members' ability to provide employee benefits, incentive, and compensation plans, their costs and effectiveness, and the role of those plans in the American economy.

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