One subset of employee benefits that doesn’t always get the spotlight are tax-advantaged benefits.
By Christa Day | March 25, 2021 at 10:32 AM
In a year filled with uncertainty, one thing became quite certain in 2020. Employee benefits are an essential part of the American workforce. Just how essential?
Quite essential, it turns out. According to a recent Prudential report, a majority of workers believe COVID-19 has made benefits much more important. In the survey, 77% of employees said benefits programs were a large part of their compensation with 73% saying benefits are a large reason why they would stay at their company or organization. Because of the pandemic, three-quarters of workers said having benefits through their employer are “now more important than ever before.”
Like the ability to work remotely, which once was considered a nice option but not a necessity, workplace benefits are clearly viewed as essential by employees. And we’re not just talking health care, which is obviously at the top of the list. One subset of employee benefits that doesn’t always get the spotlight are tax-advantaged benefits.
What are tax-advantaged benefits?
Yay for HSAs: Health savings accounts (HSAs) are accounts designed to help employees with high-deductible health plans save for medical expenses. How do we know? A whopping 28.3 million Americans had an HSA last year, a number that has steadily grown over the past decade. Ninety-five percent of employers are now providing account-based plans with HSAs. HSAs are attractive because they allow an employee to set aside pre-tax dollars to get a better handle on unexpected health care costs.
FSA – can we say, flexible? 32 million Americans have a flexible spending account, or FSA. Similar to an HSA, an FSA allows users to set aside pre-tax dollars. With an FSA, you have access to the entire amount you want to set aside on day 1 of the plan year.
Enter the HRA: Health reimbursement arrangements (HRAs), which are self-insured arrangements that are established and completely funded by employers, help reduce insurance premiums, provide employees with greater control over their health care expenses and reimbursements to employees are not taxable. Approximately 14 million people have an HRA.
What did we learn about these flexible benefits in 2020? Let’s take a deeper dive into these tax-advantaged benefits and see what’s working and what’s not.
What’s working with tax-advantaged benefits
HSAs stay even if job lost: HSAs are definitely helping working Americans as we move through the pandemic. In a year where many people lost their jobs, they did not lose their HSAs, allowing them to continue to spend existing funds on qualified expenses.
Female products get eligible: In a move that many consider a bit late (but better than never), the CARES Act made feminine care products HSA and FSA eligible for the first time. That means people can spend their tax-free dollars on tampons, pads, liners, and cups. We’ll take it as a win.
FSAs changing with the times: With 2020 being a year of unprecedented changes, FSAs have been trying to go with the flow. First, employers last year could choose to allow employees with FSAs to change their contribution amount or even open or close an account without having a life-changing personal event. Second, furloughed employees could still be considering full-time employees for purposes of maintaining an FSA, depending on your employer.
No prescription paperwork for OTC meds: The CARES Act ushered in another win for HSA and FSA eligible expenses with over-the-counter (OTC) medicines. Individuals no longer need to obtain prescriptions for OTC medicine in order to use their FSA or HSA dollars to buy them. This paperwork prescription requirement was keeping a lot of people from saving money using tax-free dollars on OTC medicines, and now we’re all free to do so (permanently) without the paperwork trail.
Yay to new HRA type: In the midst of COVID-19, HRAs have proved resilient and flexible, helping employers maintain benefits. At the start of 2020, HRAs changed considerably with the government allowing employers to provide a new type of HRA called individual coverage HRAs, better known as ICHRAs.
What’s not working with tax-advantaged benefits
Let’s ensure PPE/sanitizers are considered qualified medical expenses: Section 213(d) of the Internal Revenue Code defines what expenses are considered “qualified medical expenses” for purpose of the deduction for medical expenses on an individual’s tax return and as a tax-free payment or reimbursement from an employer-provided health plan or HSA. Medical professionals have recommended the use of face masks, hand sanitizers and disinfectants as a means of preventing the spread of COVID-19. Under the current provisions of the tax law, it is unclear whether such items are considered to be qualified medical expenses in all cases.
Representing over 33 million employees through our member companies, my organization ECFC has asked the Department of the Treasury and the Internal Revenue Service to provide guidance that would state that face masks and hand sanitizers and disinfectants are qualified medical expenses under Code section 213(d).
The “care” in “dependent care” needs work: Dependent care FSAs, which lets individuals set aside pre-tax dollars to offset work-related dependent care costs such as preschool, summer day camps and before and after school programs, have traditionally been an effective and simple way to save money while taking care of your loved ones so you can continue to work.
Unfortunately, the effectiveness of dependent care FSAs has been lessened by the fact that statutory $5,000 limited was set more than 20 years ago and has never been adjusted for inflation. The amount falls far below dependent care costs in most parts of the country.
With the dependent care FSA limits remaining the same and little flexibility built in for COVIDS-19 factors, childcare became a big problem for parents and families. Many parents had to quit their jobs or reduce their working hours because of a lack of childcare. Essential workers did not have that option. They were often left scrambling for childcare. Congress needs to act to make sure dependent care FSAs have a higher limit and more flexibility for funds to help cover skyrocketing prices for childcare. Dependent care FSAs do work but not as effectively while stuck in their current limit.
COBRA not cutting it: With unemployment still high and COVID-19 not showing signs of abating, many Americans are concerned that they will not be able to play for all their health care needs this year. Many of those who were furloughed or lost their jobs last year ended up in COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act. It is a law that mandates that an employer offer prolonged health coverage if an employee is laid off or quits. COBRA falls into the not working category because it is very expensive as well as confusing for many employees and employers alike.
COBRA speaks to the larger issue of expanding the portability of health insurance and how it can be used to meet the needs of an ever-changing and transient workforce, particular during this pandemic. COBRA is not cutting it for many Americans. This one requires a more thoughtful and thorough overhaul and is high on the list of overall health care concerns in our COVID-19 economy.
The good news is COVID-19 has made benefit offerings a focal point to help workers navigate health care, mental health and family challenges. In 2020, employers had to get creative, stay flexible and apply stop-gap measures. Some of these measures worked, other did not. As this pandemic made frighteningly clear, employee benefits are essential. What’s next? Let’s hope we can improve what’s not working, and close more employee benefit gaps for Americans.
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Source: Benefits Pro