Is ‘Free’ FSA Administration Really Cheaper?
Let’s face it … we all live in a world where ‘free’ feels better. With budget constraints and demands, the less something in one area costs means that more is available to spend elsewhere. As an employer, this is an easy and seemingly rational path to follow in employee benefits spending. When you have the opportunity to obtain a benefit for ‘free’, you jump on it to open up that money to spend in other areas.
One employee benefit sometimes available to obtain for ‘free’ through carriers or vendors is a Flexible Spending Account (“FSA”) plan. If an employer has another more costly line of service placed with a carrier or vendor, that carrier or vendor will sometimes offer FSA administration for ‘free’ as a loss leader to help them keep the more profitable business. This is a productive strategy for the carrier or vendor and at first glance for the employer as well.
However ‘free’ administration can actually cause the benefit to be more expensive. How? First, a quick refresher: FSAs are vehicles that allow employees to set aside pre-tax dollars for various out-of-pocket expenses. There are two FSA models: (1) the Health FSA for medical/dental/vision/hearing expenses, and (2) the Dependent Care FSA for work-related child care expenses. Every dollar that an employee places into an FSA is a dollar for which an employer does not have to pay the applicable FICA match. So for every dollar set aside by employees, an employer saves $0.0765; or for every $100, an employer saves $7.65; or for every $1,000, an employer saves $76.50. It is easy to see that the more employee money flowing into FSAs means much greater tax savings for the employer.
So back to the simple one word question above: How? How can something ‘free’ end up costing more? We can safely assume that if something is provided for ‘free’ in the business world, the provider of that service is not invested in the overall success of the benefit from both a compliance perspective (another subject for another time) and in increased levels of employee participation. As a matter of fact, less participation is inherently better for that provider since that means less work. Thus, from both a service and an education perspective, less is more in the mind of the ‘free’ provider. However, when someone is paid for a service and the fees paid are based on the number of participants as they are typically in the realm of FSA administration, the provider very much has a vested interest in increasing levels of participation. After all, more participation means more fees paid, but that increased participation also means more employee dollars flowing into the plan … thus greater employer tax savings.
Let’s look at a hypothetical 100-employee group with ‘free’ FSA administration. There may be 15 participants and a total of $10,000 in FSA elections. That is a total of $765 in tax savings for the company. Thus the company has saved $765 net since the administration is ‘free’. Now assume this same group uses an FSA administrator that gets paid to administer the benefit. That administrator utilizes education and resources with the goal of maximizing FSA participation and total elections. Suppose participation then jumps up to 30 employees and a total of $50,000 in FSA elections. That leads to a total of $3,825 in tax savings for the company, and after the administrative fees of approximately $2,800 are paid, the company has saved a net of $1,025 – over $250 more in employer net savings vs. ‘free’. Also completely ancillary to this discussion but no less important and maybe more is the cumulative employee tax savings. Assuming a 25% tax savings for employees on dollars run through the plan, the ‘free’ administration scenario adds $2,500 back into participants’ paychecks whereas the paid administration adds a whopping $12,500 back into participants’ paychecks.
So I ask you … is ‘free’ FSA administration really cheaper?