How Flexible Are Your Flexible Benefits?
By: Barbra Volpe
Lisa Crass
Cheryl Hurt
Shaun Montalvo
Karla Smith
Compensation and Benefits
HRM 3213
Mid – Continent University
Facilitator: Dana Cosby
December 5, 2012

How Flexible are flexible spending plans? Only as far as the organization will allow it to bend. Flexible spending accounts (health FSA) are very common today with major health care providers and seem to be very popular with the people enrolled in these programs. These are also known as health reimbursement accounts, health savings account and the like, are components of ways for individuals to allocated funds (Wikipedia, 2011). Funds are deducted from your weekly paycheck and may be used to pay for out-of-the pocket expenses. These funds are tax deductible and “pre-tax” dollars are a benefit to people.
Flexible Benefit Program
What is a flexible benefit program? A flexible benefit program is a program that allows eligible employees to choose and pay for benefits such as medical insurance, life insurance, short and long term disability, out-of-pocket medical expenses, child care or even adult day care. These benefits are paid for out of their pre-taxed income. One benefit for an employee who takes advantage of a flexible benefit program is that the insurance and other benefits that they contribute to are usually of a better quality than what they could purchase on their own. This is because the company that is going to supply these can get a better price and better benefits for a larger group, such as the company they are working for. If a person were to go out and try to get the same benefits on their own they would be so expensive that the average person more than likely would not be able to afford them. When an employee pays for these benefits with their pre-taxed income they actually end up paying less in taxes. According to www.flexbene.com, “This pre-tax allocation provides you with a 26% to 42% tax savings on your qualified expenses.”
If an employee has a flexible spending account into which they deposit pre-taxed income into to pay for out-of-pocket medical expenses they need to be careful on how much that they think they will need in that year’s time. The reason for this is because whatever money is left in that account at the end of the year they will lose. That money typically does not roll over for use into the next year. When a company is setting up a flexible benefit program there are some decisions that need to be made before anything is done. According to Joseph J. Martocchio, author of the text book Strategic Compensation “HR professionals must address fundamental issues, including: Who receives coverage, Whether to include retirees in the plan, Whether to deny benefits to employees during their probationary periods, Financing of benefits, cost containment and communication.” It is a good idea when companies who are going to set up a flexible benefits package to have their Human Resource Department (HR) talk to the employees. This is so that HR can find out what the employees opinion is of the current insurance program and what they think can be done to improve their benefits program. This is a time when HR can also find out from the employees how they think the company’s benefit program measures up to other employer’s benefits programs. This information can be gathered by have a meeting with each separate department, have the employees fill out a survey or questionnaire or meet with each employee in a one-on-one setting. The best and most cost effective way would be to have a mandatory meeting so that the HR department is not answering the same questions over and over again. When the decisions are being made about what benefits the company is going to offer to their employees the HR department needs to take a close look at what benefits the employees have now. They need to look and see where the employees are lacking in benefits or if the coverage of the benefits could be better. If this is done they can see if they could add the benefits needed to the new flexible benefits program. The company also needs to remember that having the same flexible benefit program for every employee will not necessarily work for everyone. A person who is single may not need or want the same benefit plan as an employee that is married or that has a family. A person who has no children may not need a dental insurance plan that will cover braces for children. The insurance plan that covers braces would more than likely be more expensive than a dental insurance plan that does not cover them. It can be a great help when setting up the flexible benefit program to have someone from a company that manages these types of programs for other companies to help with this one. There are companies that specialize in these programs and do nothing but manage them. It may be the best way to go if it is a very large company with several locations. If the company is a small business there is software that is available to them so that they can manage the flexible benefits program themselves. Once the decision has been made on the different types insurance and programs that the company will offer HR will need to be able to explain these programs to the employees. The HR department can give a handout or send an email to each employee to let them get familiar with the programs. This information needs to be put in laymen’s terms so that everyone is able to understand what the benefits are because the terms that are used by insurance companies can be hard to understand.
After this has been done, the HR department will need to have a meeting to go over each benefit and answer any questions that the employees may have. This will help the employees decide which program to sign up for. There are a lot of companies that are switching their company’s benefits over to a flexible benefit program. This type of program can be more economical for the company and its employees. When employees take advantage of the flexible savings program it can help keep them from paying a large lump sun out of their pocket. There are a lot of employees that like the flexible benefits program and the coverage by this program can be better than the previous program they had.
“Flexible benefits, or “flex,” is a strategic human resources solution that can give companies a truly competitive edge in winning the global war for talent and containing costs.” (Koo,2011) Flexible benefits are a great asset for any company to provide. They offer cost cutting advantages and many options for employees. Flexible benefit plans allow employees to choose the benefits they need from a package of programs offered by an employer. This in turn reduces the amount the employer has to contribute. Flexible plans have become popular among employees because health and child care costs have risen tremendously over the past decade.
Flexible benefits are an opportunity for employers and their employees to save taxes on health insurance premiums and other family costs. There are several types of Flexible benefits that are authorized by the Internal Revenue Code. These benefits may be offered through payroll deductions or employer funded both on a pre-tax basis.
This keeps the employees from having to pay state, federal and FICA taxes on these amounts and the employer also saves on the matching FICA. This is an ideal situation because both employer and employee save money through Flexible Benefits. Flexible benefits should be offered because due to rapidly escalating health insurance premiums employers are forced to choose between cutting benefits and absorbing the increased cost. Flexible Benefits help employers relieve the expense of increased insurance premiums, while maintaining the quality of benefits for their employees. They provide a creative opportunity to customize benefits and address specific needs. This then encourages employees to be proactive with their health needs rather than avoiding preventative care which is often a common result of cost shifting or cutting benefits. “Flex offers plan sponsors a true opportunity to optimize employee use of employer-provided dollars, maximize tax advantages for both the company and employee, and create broader employee choice without unduly complicating administration.” (Abbott,1996) Different types of Flexible benefits are Section 125 Cafeteria Plans, Flexible Spending Accounts (FSA), and Health Reimbursement Arrangements (HRA). With the Section 125 Plan which may contain several types of accounts, including medical expense reimbursement, childcare reimbursement, and payroll savings for insurance premiums. The Employer keeps any and all unused funds after the plan year. This plan enables employees to choose between receiving some or all of an employer’s nontaxable benefits and receiving cash or other taxable benefits such as stock.
Flexible Spending Accounts are tax deferred savings accounts established by an employer to help employees meet certain medical and dependent care expenses that are not covered under the employee’s insurance plan. FSA’s allow employees to contribute pre-tax income to an account set up by their employer. They can later withdraw these funds tax-free to pay for qualified health insurance premiums, out of pocket medical costs, day care provider fees, or private pre-school and kindergarten expenses. HRA Plans are always funded by the employer for specific types of expenses this plan allows employees to carry forward unused benefit dollars from year to year. Benefits for the employer includes qualified claims that are tax deductible, and employers know their maximum expense related to their health care benefit. Having good flexible benefits is a positive way to keep a company thriving and employees happy. Good benefits motivate an employee to keep their job and do good work for the company because they want to keep their job. If the employees are happy and motivated the company will surely see the results of it.
Flexible health care plans allow the policy holders to “bank” funds and allocate them to different uses, only medical and dental claims that are not covered by insurance. As a worker I would like working for an organization that would not mandate how I spend my money. I would be very satisfied knowing when an emergency should happen that I can exercise my freedom to spend it. An example: You elected to put $3600 in your flex spending account which is deducted in $300 increments from each of your twelve monthly paychecks. In April, your daughter falls off the balance beam in a gymnastics competition and breaks her ankle and has extensive ligament damage.

When the health care bills start rolling in, you have totaled $1100 in deductibles not paid by your employers insurance and must be paid out of your own pocket. Your flex spending account balance is presently sitting at $900 (January, February, and March deductions from your paycheck). No worries… guidelines for medical flexible spending accounts permit you to submit the full $1100 reimbursement for immediate payment to you. In effect, you are able to get the cash whenever you need it as long as it does not surpass the total amount you pledged for the year at signup (FlexibleSpendingAccountsOnline.com, 2005). Had it not been for this type of plan I could not have paid for the health care needed. This has been an advantage to many parents because often time injuries will use all that is allocated for one year. This advantage to a health care plan is attractive to people who possible have hard time saving money and who is largely among the middle class. The other advantage is that these types of plans have reduced absenteeism and an employee turnover, which helps companies reduce cost because training in longer and requires more time and can slow down production (Martocchio, 2013). Many employers have implemented FSA during the Bush administration and whose employees involvement and reducing the cost that often weighs down companies competitive edge.
Along with advantages there are disadvantages and this plan has them also. This biggest pitfall is if you do not use it you will lose it. Even if it is only $100.00 remaining funds will be lost. Many people them choose to have something done to use all the money in the account. Once your deductable is paid it is nice to able to take care of things you may not have chosen to do throughout the year (FlexibleSpendingAccount Online, 2005).
Using all the money in your account would be wise to the policy holder, whether you retire or quit of the end of the year is approaching, take your money you put it and use it. Yes these are your pretax dollars however, that does not matter to the company, the health care plan and the government.
Disadvantages
Employees have many decisions to make when choosing to accept a job within an organization. One of the most critical choices they will make is which benefits to accept. These benefits do not come without a price; however, these are paid for from the employees earnings prior to being taxed, with exceptions. As healthcare costs increase, the costs of flexible benefits through the employer are increasing as well; yet the majority of organization and employees agree that these benefits, which do carry their namesake, outweigh the disadvantages of flexible benefits. The benefits could be more beneficial to all parties if they were used to their full potential and both the organization and the employee realized all of the tax benefits available to them. A couple disadvantages of flexible benefits for the organizations follow: It may require a high initial cost for the organization to get the right system in place. Some organizations that offer many flexible benefits require more human resource workers to inform the employees about the benefits of each option available. This adds a higher payroll expense to the company to employ the necessary number of workers to deliver the needed level education and assistance in selecting benefits annually and for newly hired employees. “Administration is more difficult that one – size – fits – all plans” Another potential disadvantage for the organization is with Flexible Spending Account (FSA) in the situation of an employee using their total benefits before the full amount has been deducted from their payroll and then they quit their job or have been relieved of their duties for one reason or another. The organization is unable to request the remaining funds at this point. For these reasons many organizations are choosing not to participate in flexible benefits.
The chart below shows through the organizations in China polled, if and at what percentage, companies that are considering implementing flexible benefits. (Zhou, 2012)
This chart shows that in 2010 87% of companies polled in China intend on providing flexible benefits of some degree; 63% of those companies being non – committal.
A few of the disadvantages of flexible benefits for the employees follow: Employees without flexible benefit plans have said to find comfort in knowing what to expect, with respect to out – of – pocket expenses. When transitioning to flexible benefit plans it is sometime unclear what charges to expect. Flexible benefits are available to the employees but not all are available for employees’ domestic partners.
The organization has less control over the quality of the voluntary benefits. This can cause contention between the employee and the organization if the employee is displeased.
If an employee were to quit, be fired, or reach the end of the plan year and not spent their money in their FSA they would forfeit the remaining funds in that account.
You are unable to take them with you when you leave, unlike the Health Savings Account, which could be rolled over to the next plan year. This is the “use it or lose it” rule.
The purpose of this rule is to encourage employees to pay careful attention to planning their spending. The law is designed to force employees to carefully select the designated amount to annually set aside for inclusion in the FSA. Any funds forfeited through this rule are company owned by law…..this potential forfeiture places a true damper on employee FSA participation” (Martin, 2000, p.18). When an employee makes educated elections and contributions to a flexible benefit, it can be very advantageous, however, we do see the organizations that are unable to educate their employees enough for them to achieve that level of effectiveness, leaving employee paying for benefits that they are not utilizing to their full potential and employers that could be maximizing their commitment from the employees more effectively.
Flex Spending
Whether an employee has insurance or waives having insurance, having a flex plan can be a great additive or alternative for health care expenses.
If an employee decides to keep his insurance, having the flex plan can offset the deductibles that occur during the year. Here are some tables for having insurance and flex plans.
First, when hiring a new employee, it must be determined whether they have insurance previously and whether they have an existing condition. If the person has an existing condition, they must wait one year before being able to buy insurance, (unless they have had insurance previously). This is a great time to pay for flex spending. When a person is eligible for insurance they must decide what type of insurance they want to invest in. For the state of Kentucky, here are the insurance premiums and options:
Commonwealth Standard PPO | Total premiums | Employer Contribution | Employee Contribution | Single | $496.14 | $496.14 | $0.00 | Parent Plus | $764.68 | $756.40 | $8.28 | Couple | $1144.72 | $862.54 | $282.18 | Family | $1272.86 | $984.42 | $288.44 |

Commonwealth Maximum Choice | Total Premium | Employer Contribution | Employee contribution | Single | $617.68 | $586.94 | $30.74 | Parent plus | $878.06 | $757.46 | $120.60 | Couple | $1230.98 | $859.88 | $371.10 | Family | $1404.06 | $962.06 | $442.00 |

Commonwealth Capital Choice | Total Premiums | Employer Contribution | Employee Contribution | Single | $638.16 | $600.92 | $37.24 | Parent Plus | $927.08 | $767.08 | $160.00 | Couple | $1414.46 | $921.46 | $493.00 | Family | $1568.06 | $984.06 | $584.00 |

Commonwealth Optimum PPO | Total Premium | Employer contribution | Employee Contribution | Single | $663.30 | $600.56 | $62.74 | Parent Plus | $922.88 | $727.28 | $195.60 | Couple | $1432.36 | $911.76 | $520.60 | Family | $1595.80 | $973.30 | $622.50 |
(This chart is from the 2012 Kentucky Employee Health Plan)
These premiums are for non-smokers only and the rates for smokers are several dollars higher for each option. For flex spending, the company can offer a maximum of $2500. A person will need to decide how much to take out by figuring how much a person spent the previous year or two. The flex spending account is given out on January the 1st and can be used at any time during the year. If an employee needs to take out $1500 it will be on account on January 1st. It will then be divided into twelve payments over the course of the year.
“Tom” makes $28,000 a year. $1500 is deducted before taxes, which makes the taxable amount $26,000. If “Tom” gets paid monthly, $125 per month would be deducted. There is no interest added to the amount deducted per check. Over the year, “Tom” would save $340 on taxes. If “Tom” had no flex account and had to spend $1500 out of his own pocket, his taxable income would be $28,000. If “Tom” quits his job after 6 months and he took out $1500, the company would lose the $750 owed. “Tom” does not need to take more money than he can use. If “Tom” has $250 left over on December 31, “Tom” loses that money. It cannot be used for over the counter medication anymore as of 2012. (This chart is based on example from page 10 of the Kentucky Employees Health Plan.)
If an employee is looking at buying into flex spending, they need to be aware of how much they need to borrow, how much is going to be deducted out of their check and how much their insurance is going to cost.

References
Abbott, R. k. (1996). Redefining Flex in the Next Millennium. Benefits Quarterly, 21-28. http://web.ebscohost.com.proxy.kyvl.org/ehost/pdfviewer/pdfviewer?sid=0ce2f027-9825-4d28-9d3b-7d69b218da5e%40sessionmgr11&vid=9&hid=14 Anonymous, (2012). Flexible Benefits “What is a Flex Plan All About?”.
Retrieved from: www.flexbene.com/flexiblebenefits.asp
Basu, C., (Copyright 2012). Examples of Flexible Benefits. Retrieved from: http://smallbusiness.chron.com/examples-flexible-benefits-24896.html
Koo, R. (2011). The Global Added Value of Flexible Benifits. Benifits Quarterly , 17-20. http://web.ebscohost.com.proxy.kyvl.org/ehost/pdfviewer/pdfviewer?sid=0ce2f027-9825-4d28-9d3b-7d69b218da5e%40sessionmgr11&vid=9&hid=14 Quarters, C. (1995). The Disadvantages of a Flexible Benefits Plan. Demand Media.
The Motley Fool. Retrieved on December 6, 2012. www.wiki.fool.com.
Simmons, J. (2001). Flexible benefits for small employers. (Cafeteria Benefit Plans),
Journal of Accountancy.
Zhou, A. (2012). Flexible Benefits: An Effective Prescription in China, AON Hewitt, HR Connect – Asia Pacific, Volume 5, Issue 3, 2012.