If you are in the business of selling, providing, or administering tax-advantaged health plans, you likely already understand the benefits of a flexible spending account (FSA). But for the millions of people who don’t, the benefits can seem rather unsubstantial. That’s why it is your job to articulate these benefits in a way that people can relate to.
When asked, “What is an FSA?”, we describe it in plain english as “a special account you put tax free money into to pay for medical expenses, and you’ll save the amount equal to the taxes you would have paid on the money you set aside.”
That’s typically when you see eyes open and ears perk up. You will be able to see their interest grow with each mention of the issues that actually matter to the potential buyer. In this article we examine the three most common objections to FSAs and why they shouldn’t keep someone from participating in one.
3 Common Objections to FSAs
After years of selling consumer-driven health products, our team has heard plenty of objections to having an FSA. The three top objections we hear the most often are:
- I can’t afford it
- I don’t go to the doctor
- I won’t use it and don’t want to lose money
You CAN Afford It
The people who feel they can’t afford an FSA number in the thousands. Employees believe they cannot afford “another deduction” on their paycheck. But they’re thinking about it all wrong. Instead they should think about it like putting money back into their paycheck through lowering their taxable income – simply by putting some of their paycheck straight into a special account.
The truth is you can afford it.
When someone participates in an FSA, they have to decide how much money they want to put into it throughout the year, up to the maximum contribution limit ($2,750 in 2021). Then, every pay-period they will have 1/26th of that amount (see Figure 1 below) taken out of their paycheck and put into the account (assuming they get paid bi-weekly).
But employees get so focused on the few dollars that will be missing from each paycheck that they lose sight of the savings they get in the long run (see Figure 2 below). The money you put into your FSA doesn’t count as income, so you are lowering your payroll taxes at the end of the year, and whatever amount you choose to put into an FSA, you get all of that money available to you at the beginning of the plan year so you could potentially be starting the year out $2,750 ahead!
Not Planning on Seeing a Doctor? No Problem.
Another objection we hear frequently is that potential participants don’t plan on going to the doctor that year. “Employees say they don’t need it because they are healthy.” However, what someone plans on happening with their health and what actually happens are often two very different things.
And one of the biggest misconceptions about tax-advantaged accounts is that they only pay for limited medical expenses, such as copays and deductibles. Not only can the money in an FSA be used to pay for medical deductibles, copays, prescription drugs, eyeglasses, dental visits, and eye exams, but it can also be used to purchase hundreds of over-the-counter items like medicine, Band-Aids, sunscreen, braces and wraps to prevent sports injuries, heating pads, ice-packs, contraceptives, contact solution, First-Aid supplies, cough suppressant; and any of the hundreds of other items.
Even if someone doesn’t plan on going to the doctor, they will have to purchase some of the items that are in their medicine cabinet right now. And most of those items can be purchased tax-free with an FSA. If someone doesn’t plan on going to the doctor, they should still open an FSA and put a couple hundred dollars into it just to purchase any of the items listed above (and dozens more) tax-free. Click here for a full list of FSA eligible expenses.
Participants Almost Never Lose Money
This brings us to the third reason most people think they don’t need an FSA: The dreaded “Use it or lose it” rule.
Some estimates have put the average amount of money forfeited in an FSA each year between $50 and $100, but this amount is almost never higher than the amount of money a participant saves in taxes.
If someone put only $500 into an FSA, since the average person saves about 30% on the money they put into an FSA, they would save $150. And if they forfeited $100, they would still have saved $50.
In short, while they failed to spend some of the money they set aside, they still likely saved more than that amount in taxes by using an FSA to purchase those over-the-counter items tax-free and the savings would increase as their contributions increased.
Relief for unused FSA money
In 2013, the IRS began allowing companies to offer an FSA rollover to their employees. Now, employees can rollover up to $550 (effective 2021) from a previous year’s FSA into the following plan year, and they can still contribute the maximum amount to their FSA in that following plan year (up to $2,750 for 2021).
The IRS also allows for a “grace period,” of typically 2.5 months, in which FSA participants can incur new expenses using the prior-year’s FSA funds. Employers are allowed to offer one of the two options, but not both.
However, employers can pair one of the two options mentioned above with a 90-day runout period. This allows employees to submit manual claims for any expenses incurred within the plan year that has just ended and be reimbursed with the remaining funds in their FSA. This is a standard option and will be in place regardless of whether or not a grace period or rollover option are added.
Is There Any Reason Someone Wouldn’t Have an FSA?
We’ve taken a look at the three most common reasons people think they don’t need an FSA and busted those myths. But are there any actual reasons why someone should not open an FSA? The answer is no… and yes..
The IRS will not allow someone to open an FSA if they are already contributing to a Health Savings Account (HSA) in the current plan year, with which they are using pre-tax money to pay for eligible medical expenses.
The exception to this rule is that someone can open what’s called a Limited Purpose FSA (LPFSA) that only reimburses them for eligible dental and vision expenses, not medical expenses.
Just Think of The Money Your Customers Could Save With an FSA
By now you should be pulling your hair out over the amount of money you could be saving potential customers with an FSA. But don’t worry, there’s still time to save them money in the next plan year. Don’t be surprised if you hear these objections, and know that there is a perfectly good response to each one!
Ameriflex offers award-winning service delivered by people who put your interests first. Contact us to learn what Ameriflex can do for you.