Medical FSAs used mostly by higher-end workers

October 15, 2001

ITHACA, N.Y. -- Higher-paid and better-educated workers are much more likely to use medical flexible spending accounts (FSAs) than are lower-income and less-educated workers, conclude researchers from Cornell University and the University of Minnesota. The accounts allow consumers to pay for medical care with pretax dollars.

Employer strategies for encouraging participation in this tax shelter, however, do little to boost enrollment rates, say Jennifer Schultz, assistant professor of policy analysis and management at Cornell, and Roger Feldman, professor of health services research and policy at the University of Minnesota. One exception, according to their study, is special information meetings, which were shown to increase employee participation by 7 percent among single employees but not for other employees.

"These findings suggest that FSAs may have a high social cost," says Schultz. "That is, it is a tax exemption that only highly educated employees seem to use effectively. This can be perceived by some as inequitable. If the perception of tax inequity erodes the public's trust in the income tax system, this would be a high price to pay for FSAs."

Schultz and Feldman, whose study appears in the journal Medical Care (2001, Vol. 39, No.7, pp. 661-669), analyzed data from randomly selected employees in 15 Minnesota firms. The researchers looked at 779 single employees with no dependents and 679 employees with family coverage; in addition, they looked at the strategies the firms used to promote FSAs. The researchers focused on firms that offered the same health plan and, thus, were presenting the same choices to employees in the study sample.

The researchers found that while only about 19 percent of the single employees used FSAs (with an average annual contribution of $415), 33 percent of employees with dependents had FSAs (with an average contribution of $773). They also found that higher education boosted the likelihood of participation in an FSA for single employees when compared with those who had only a high school education, or less -- some college by 17 percent, a college degree by 21 percent and postgraduate education by 22 percent.

The connection between education and FSA participation also was strong among employees with families when compared with those with a high school education or less: 16 percent higher participation for those with some college, 31 percent higher for those with a college degree and 48 percent higher for those with postgraduate education.

Interestingly, the older the single employees, the more likely they were to have an FSA; the same did not hold true for family participants. For workers with dependents, tax rates were predictive of FSA participation: Almost twice as many of the employees in the 28 percent tax bracket had an FSA compared with those in the 15 percent tax bracket.

Factors such as the number of children, health status, years in the job or the presence of a chronic condition did not predict FSA participation.
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