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Unity Health uses FSA carry-over option to ease employee stress over lost money

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Unity Health uses FSA carry-over option to ease employee stress over lost money

Adding an automatic carry-over feature to employees' flexible spending accounts has taken the pressure off Unity Health Care Inc. employees who contribute to FSAs.

The feature the IRS authorized nearly a year ago eliminated employees' worries about losing unused money in their FSAs, said Michele Ottley, human resources lead benefits specialist at Unity Health, a Washington-based health service provider to the lower-income uninsured and underinsured.

The IRS rule allows employees to automatically carry over up to $500 in their FSA accounts to the next year to pay medical expenses.

That approach is an alternative to one the IRS authorized in 2005. Under that so-called “grace period” approach, FSA participants can roll over their full unused balance remaining at the end of a plan year. However, the balance must be used by the end of the first 2 1/2 months of the following plan year or be forfeited.

With the $500 carryover rule, “the panic of having to spend the account balance before the deadline” ended for the 25% to 30% of the workforce with FSAs, Ms. Ottley said.

Unity Health has company in adopting the approach.

Aon Hewitt said nearly one-quarter of its clients with FSAs have added the feature. In addition, 35% of 49 employers responding to a National Business Group on Health survey said they have implemented the $500 carry-over feature.

“We think we will see a continuing increase” in employers adopting the $500 carry-over feature, said Craig Rosenberg, an Aon Hewitt health and welfare benefits practice leader in Norwalk, Connecticut.

Employers that add the $500 FSA carry-over provision see employee enrollment rise, according to FSA administrator Alegeus Technologies L.L.C.

Among Alegeus' clients adopting the $500 carry-over provision, employee enrollment in FSAs is 11% higher compared with employers that have yet to adopt the provision, said Alegeus Executive Chairman Bob Natt in Waltham, Massachusetts.

However, one employer that does not plan to make the switch is The School District of Palm Beach County, Florida.

Moving to a carry-over FSA would have been too “confusing” for employees and the $500 cap is too small, said Dianne Howard, the school district's director of risk management and benefits.

“Now 100% carry-over — that would have been great,” Ms. Howard said.

Some experts say the health care reform law may be a factor in why more employers have not converted their grace-period FSAs to carry-over FSAs.

The Patient Protection and Affordable Care Act capped annual FSA contributions at $2,500 in 2013, while there was no limit previously.

“With a $2,500 limit, there is less employee fear of forfeiture of unused contributions,” said Andy Anderson, a partner at Morgan, Lewis & Bockius L.L.P. in Chicago and a member of the law firm's employee benefits and executive compensation practice.

“The likelihood of large forfeited amounts was reduced,” said Michael Thompson, a principal at PricewaterhouseCoopers L.L.P. in New York, referring to the $2,500 limit.

At the same time, grace-period FSAs may offer certain employees “more bang for the buck” than carry-over FSAs, Mr. Anderson said.

One frequently cited example is employees who know that a family member will need orthodontia work early in the following plan year.

In that situation, employees could roll over their entire FSA balance remaining from their prior year — up to $2,500 — and use it to pay for the dental work by March 15 of the following plan year.

Another factor that has held back employer adoption is their focus on complying with provisions of the health care reform law that go into effect next year, including one that imposes a $2,000-per-employee penalty on employers that do not offer coverage to most of their full-employees working an average of 30 hours per week.

“So much of employer focus is on ACA compliance for 2015. That is a major employer effort, and that means less focus on FSAs,” said Rich Stover, a principal at Buck Consultants at Xerox in Secaucus, New Jersey.

Employers have not heavily focused on FSAs because “they have other issues that are much more pressing,” said Jay Savan, a partner with Mercer L.L.C. in Atlanta.