Employer-Funded FSA & Matching

[Guest ConceptCorner]

75 employee company w/ high utilization. Large renewal increase. Cannot move due to poor experience. Employer needs to curb usage of the group medical plan so he can go shopping next year. Wants to know what options he has. This idea seems to make sense but I would like some feedback.

We would raise the deductible from $250 to $750, lower co-insurance from 90% to 80%, drop the office visit copay and put a $150 dedutible in front of the Rx card. Drop the dental coverage. The savings are significant so we would establish an FSA program with a debit-card. The employer can make a contribution of about $500 to the each FSA account. At the end of the year, the use-it or lose-it provision gives the employer his money back if the employee doesn't use it. Even with the new HRA's the employer likes the Employer-Funded FSA better because he gets unused money back. It should take some presure off the group medical plan so he can establish better claims experience.

Anybody using this idea successfully? Any ideas, thoughts, suggestions?

P.S. Anybody successfully using Employer contributions in form of a "match". I know the 25% rule becomes an issue with a match but I would like to get some feedback.

[Ron Snyder]

What you are describing fits the definition of a "Health Reimbursement Arrangement" under the new IRS Notice 2002-45 and Revenue Ruling 2002-41. You may wish to consult those for clarification of rules that apply to employer-funded HRA/FSAs. They are not subject to the "use-it-or-lose-it" requirements applicable under IRC section 125.

And the direct answer to your question is yes, people are already doing this. I have helped several groups set up HRAs already, and others are doing the same. There are several models extant, and yours is not uncommon among them.

I have a TPA client who is changing all of his clients over one by one to such arrangements.

There is a lot of information on the internet abour such arrangements. Do a search on "defined contribution health plans" and "consumer driven health plans" and you will find a myriad of articles.

[papogi]

Since you want the possibility of forfeitures, realize that the uniform reimbursement requirement will apply to the FSA. In other words, it's possible for employees to clear out the FSA and quit. Even so, you should still end up with an experience gain. With HRA's, you don't have to follow the uniform reimbursement requirement. Further, going the route of the true employer-funded FSA, you bypass almost all COBRA requirements. You have to contend with COBRA for HRA's. There's nothing wrong with sticking to an FSA, rather than going to an HRA.

[SLuskin]

We are using that idea inside of the cafeteria plan, not outside like the new HRAs. We have custom-designed a number of them, and all seem to be working well so far.

I anticipate doing alot more of that as premiums skyrocket and benefits plunge.

[Guest ConceptCorner]

Thank you for the replys. I really like this idea and it seems to make sense with the dramtic rate increases that most "insured" groups are seeing. 15 years ago when I started we were selling $500 deductible 80/20 plans with no office visit copays or Rx cards. Everything applied to the deductible. The unfortunate side-effect of the managed care era of the late 80's and 90's is that the benefit expectations in the minds of the employees are now very unrealistic for todays environment. Employers are going to have to raise deductibles and eliminate many of the upfront benefits. I think the idea of an Employer-Funded FSA is a great trade-off. Even if the employer only makes a token contribution it should help employees learn the benefits of an FSA.

It really surprises me that many benefits professionals are still unaware that FSA's can be funded by the employer. I really think the Employer-Funded FSA is a more appealing option than the new HRA because the employer has the chance of getting their money back at the end of the year!

[GBurns]

Why would you think that the employer gets back the unused FSA money and not the Plan or the plan participants?

[Guest ConceptCorner]

I say "employer" but I mean the money (forfeitures) would stay with plan. The refunds are helping the employer to offset the next years expenses and be used to offset the next deposit to the employees accounts. If the employer put $500 in each eligible employees account and he averaged getting back $100, then the next year he would only have to come up with $400 in addition to the $100 average forfeiture to provide that same benefit. Or, I suppose, he could offer the same $500 deposit plus any forfetures, In this case $600 the following year. The employer should not expect any forfeitures but some will come back anyway.

Since my original posting I have presented the idea to three employer groups and they have all thought it soulds like a great idea. I have learned also that the amount of employer deposit can be different based upon plan design and this is not considered discrimination as long as each employee has a choice. In other words, if the employer offers a dual choice plan, one "rich" option and the other a "catastrophic" option, the employer can offer to pay 100% of the catastrophic premium and make a deposit into the accounts of employees who choose that option. If the employee chooses the rich plan option they pay the difference in premium and get no deposit. Not a bad way to "ween" employees off of the richer plan benefits.

[Guest Beth N]

GBurns - There's no problem with the employer taking the money back at the end of the year, is there? It's not employee contributions, since the proposal was for the employer to fund the accounts with employer contributions only. I thought you only triggered ERISA's plan asset rules where you have employee deferrals.

I'm interested in more discussion on the match issue. What about a FSA designed to reimburse only dental expenses, where employees pay $300 in premiums to get $800 maximum in coverage. ConceptCorner - I'm not familiar with the "25% rule" you cite. What's that? Also, is there any requirement that employer contributions have to be available for cash-out to participants who do not elect coverage? What is the authority for a matching contribution or a contingent contribution (i.e. employer contributes $ only if employer contributes $)?

[Guest ConceptCorner]

Hi Beth,

I have not done a matching plan but I know they are being done. That was the purpose of my original post to see if anyone had experience with them. When I say 25% rule, I'm referring to the discremination test.

As far as setting up an FSA contribution just for Dental I am almost certain this cannot be done. The employer could tell the employees that this is the reason he/she is seeting up the plan but the employees are allowed to spend it on anything the IRS deems allowable for FSA's.

However, it is my understanding that you can specify targeted benefits (i.e. dental only) under the new HRA rules.

Also you could always establish a dental reimbursement arrangement under a Sec 105 document.

[papogi]

Beth N, the 25% rule is the Concentration Test for Key Employees. No more than 25 % of all dollars funneled through a 125 plan can go toward benefitting key employees. This includes pre-tax health premiums, HCFSA amounts, DCSA amounts, etc. Since there is no cash option for true employer amounts as in a matching set up, my understanding is that employee money is treated as if it went through the 125 plan, and the employer money as if it went through a basic, bare bones 105 plan.

Whenever there is a choice between cash and a qualified benefit, 125 allows the employee to get around the constructive receipt issue. If there is no cash option (and this is certainly allowed, based on the plan design), then the plan is not qualified under 125. This essentially makes it a simple 105 plan.

[papogi]

An FSA just for certain expenses is allowed. The expenses under Section 213 are qualified medical expenses which can be reimbursed under an FSA, HRA, 105 plan, etc. An employer has the discretion to limit the allowable expenses. The IRS still says these things are reimbursable, but if your employer's plan does not allow it, the employee can always write those expenses off on Schedule A of their taxes (subject to the 7.5% AGI floor). An FSA is still an employer plan with an SPD. Employers can specify a definition of dependent which might be more restrictive than that under Section 152. An employer can also specify what changes of status they will honor under the FSA. They can also specify which expenses they want to allow under the FSA.

[SLuskin]

You can make an FSA as broad or as limited as you want. It just has to be described in the plan doc and the SPD. We have 1 client that funds a dental/vision only fsa for all employees, 1 that funds a hospital-inpatient copay only fsa, and others that simply seed the fsa for each employee and allow them to use the money for any allowable expense.

[Guest ConceptCorner]

Wow, I guess I just learned something. I did not know you could specify which IRS approved expenses can or cannot be reimbursed with an FSA. That should make the case for using an employer-funded FSA even stronger. It would give the employer even more control over what expenses an employee can use the money for. How specific can an employer get? Could the employer state that FSA dollars can only be used to cover deductible and copays? If so, the chances of seeing forteitures becoms even greater.

I also recently found out that an employer can establish a "use-it or lose-it" provision in an HRA and they can apply it to any level they want. In other words, they can say all unused money comes back or only a portion each year or all of it rolls over. Pretty interesting stuff!

[papogi]

Yes, the employer can specify whatever they want (deductible and copays only, for example).

I agree with you on the advantages of an employer-funded FSA. No doubt HRA's have and will get all the press, but many employers may really want employer-funded FSA's if they knew they existed. Many companies only see FSA's as employee funded vehicles, which they don't have to be.