Published October 2005

Biz, employees can save
with flex benefits

By Evelyn Lane
Guest Columnist

With health insurance costs spiraling upward, it’s increasingly difficult for a business and its employees to keep pace. But there’s help. Some financial services providers have a product called a “flex benefit program” that can reduce a company’s expenses, improve the benefit package, reduce employees’ health-care costs and increase employees’ take-home pay.

Also known as a “Section 125 plan” or “cafeteria plan,” a flex benefit program enables workers to annually set aside in a separate account the amount of money they estimate they will need in the next 12 months to pay for medical-related expenses.

The funds are deducted from the employee’s salary on a pre-tax basis and saved in a special account, thus reducing the employee’s taxable income. This, in turn, reduces the employee’s FICA tax (Social Security and Medicare), state income tax and federal income tax.

The employee’s company also saves money because it does not have to pay matching FICA taxes for participating employees.

Employees can use their accounts to fund their monthly medical, dental and vision insurance premiums as well as nearly all other medically related expenses. Examples of items not covered are cosmetic surgery, one-a-day vitamins and other general well-being expenses.

Employees also can establish flex accounts of up to $5,000 to pay for day care for their children and dependent elderly parents — as long as care providers are not dependents of the employees.

The employees pay the bills up front and submit receipts. They are reimbursed with funds from their accounts on a tax-free basis.

Our experience has shown that most employees will use all of the funds they have set aside in their accounts each year. Funds that are not used by the end of the year are turned back to the company, which must use the money to benefit the employees in some way.

Here is an example of the possible savings: Let’s say two employees have the same gross monthly salary of $1,500 and the same monthly medical expenses of $320. One employee has budgeted $320 a month for his flex plan and sees his taxable income reduced to $1,180. The other worker spends $320 on medical expenses, yet still has $1,500 in gross income.

After assessing the same percentage of FICA, federal and state income taxes to both employees, and with all other factors being equal, the person with the flex plan will have at least $90 more a month in take-home pay than the person without the flex plan.

If you own or manage a company with 10 or more employees and you want to offer a flex plan, ask your financial services provider about the following benefits:

• Benefit cards — A high-quality financial services provider should be able to offer your employees the option of receiving a stored-value benefits card loaded with the amount they ask to be deducted into their flex plan account for that year. They then use the card, which looks like an ordinary credit card, to pay their eligible expenses. When all the funds in the account have been spent, the benefit card can’t be used until it is reloaded at the start of the following year. The card also will not work at a nonmedical-related business. The benefits card eliminates the need to save and turn in receipts for reimbursement.
• Employee communication — Your financial services provider should be able to offer your company an employee communications program in both English and Spanish to explain the benefits of the program and encourage participation.
• Easy enrollment — Your provider should be able to make it easy for your employees to participate by enabling them to enroll either with a paper form or on the Internet.
• Timely reimbursements — The employees who do not want to use a benefits card will still need to submit receipts. They should be able to submit their receipts through the mail, by toll-free fax or even by e-mail. Ask how often your financial services provider processes receipts and the length of the average turnaround time for mailing reimbursements. A high-quality provider should process receipts at least twice weekly and be able to mail a reimbursement check within two to four days.
• Customer service — Your employees should be able to phone a toll-free number and/or access a Web site if they have questions, want to check their recent claims and view their current account balances. They also should be able to download forms and access a list of covered expenses. Your financial services provider also should offer your company ongoing training and updates for new IRS rulings and systems changes.
• Company reports — A quality provider should be able to give your company a monthly statement showing total claims and reimbursement turnaround averages. At the end of the year, you should receive a report of the unused funds turned over to your company.
• Employee reports — Your financial services provider also should be able to send your employees a “red flag” letter toward the end of the year if they have not used all the funds in their accounts.

It’s always difficult to attract and retain high-quality workers. With its many advantages, a flex benefit program can help make your company a preferred place of employment. Talk to your financial services provider about the administration costs involved in setting up a plan.

Evelyn Lane is a business banking manager with Wells Fargo in Everett. She can be reached at 425-252-1620 or by sending e-mail to laneevel@wellsfargo.com.

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