Who uses flexible spending accounts: Effects of employee characteristics and employer strategies

BACKBROUND. Many large employers offer flexible spending accounts (FSAs) to shelter their employees' out-of-pocket medical expenses from taxes and thereby to encourage the purchase of health insurance policies with higher cost sharing. However, very little empirical research has examined the individual employee's decision to contribute to an FSA. OBJECTIVES. To estimate equations for the probability that single employees with no dependents and employees with family health insurance coverage will contribute to FSAs, and the amounts contributed by those with FSAs. RESEARCH DESIGN. An observational study of randomly-selected employees in 15 Minnesota firms matched with information on the strategies those firms use to promote FSAs. Measures of FSA participation were regressed on expected health care spending, employee socio-demographics, and employer strategies. SUBJECTS. 779 single employees with no dependents and 679 employees with family coverage. RESULTS. Education beyond high school increases the probability that both types of subjects will contribute to FSAs, with marginal effects ranging from 16 to 48 percent. The FSA contribution rate for families doubles when the family's marginal federal income tax rate increases from 15 to 28 percent. Employer strategies to encourage participation are also effective in promoting FSAs. CONCLUSIONS. FSAs are used mainly by high-income and highly-educated workers. We question whether this is an equitable use of the income tax code.