My Personal Finance Journey

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$3,000 Free Credit Line Via Flexible Spending Accounts

Contributed by mm | February 13, 2005 1:42 AM PST

As I forecasted in my November post of Flexible Spending Account (FSA) enrollment, I begin to enjoy the benefit of free credit line from FSA. In the month of January, I contributed $416.67 to my dependent care FSA, but received reimbursement for my son's monthly daycare bill of $940. In other words, I obtained an interest-free credit line of $523 from my kind employer. Plus, this trend will continue for the next four months, and finally result in a $2,500+ 0% APR loan to be paid off for the rest of the year. On the medical FSA front, we expect some major dental surgery in the first half of the year, and we will, again, benefit from a free credit line in the range of $500-$700 by summer time.

In an email exchange with one of PFBlog readers, I realized that not all employers offer the benefit of full reimbursement beyond the amount you actually contribute. This prompts me to spend some time to look into this matter. Here is what I found:

For medical FSA, all employees can get reimbursed for the full elected amount no matter how much contribution is made so far. This is usually referred to as the "Section 125 uniform reimbursement rule." IRS Publication 969 also made it clear that:

"You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed."

However, for dependent care FSA, there is no such regulation requires employers to reimburse upfront. So why some employers choose to restrict dependent care reimbursement to the amount that has been actually contributed? There are two major reasons:

1. Cashflow Management Concerns

As my example illustrated, at one point of time of the year, an employer needs to prepay a few grands before it can collect the money from the employee. For a medium-sized business, this can easily run into millions of dollars, which can cause a cash crunch in the middle of the year for some businesses.

2. Credit Risk

More importantly, if an employee leaves the job within the year, and claims all his FSA elected amount beforehand, employers will have a hard time getting the uncontributed money back.

Therefore, it is quite understandable that some employers choose not to extend this free credit line when not necessary.

For me, a big thank you to Microsoft. Even after some undesirable benefits cut like the notorious ESPP change, its benefit plan still have some highlights.

This Post Has Received 2 Comments. Share Your Opinions Too.


Syarzhuk Commented on February 13, 2005

I used to work for a benefit administration company; my understanding was that all dependent care plans could only pay out the amount contributed so far. Guess I was wrong - but not a single one client of ours did what Microsoft does for you.

What is your estimate of how much this arrangement will help your bottom line? My back-of-the-napkin calculations show about $60 or so.


mm Commented on February 13, 2005

It's approximately $1,500 average float throughout the year. At 3% saving rate, it's about $45 benefit -- not much actually.

It sounds like Microsoft really cares about its people in this area. Our plan reads:

"Microsoft has pre-funded your dependent care account to match your annual elected amount. You may be reimbursed for the full amount of an approved request, regardless of the amount contributed to the account to date, up to the total amount elected for the year."

Thank you for sharing your experience!


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