This report presents an analysis — requested by the Office of the Secretary of Defense as input for Congress — of the implications of flexible spending account options for active-duty service members and their families that would allow pre-tax payment of dependent care expenses, insurance premiums, and out-of-pocket medical expenses. The authors evaluate the benefits and costs of these options to service members and the U.S. Department of Defense.
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Research Questions
- How might FSAs financially benefit active-duty service members and their families?
- What would be the aggregate cost to DoD, accounting for the cost of administering FSA options and the savings in payroll taxes from reduced Social Security and Medicare taxes?
- What legislative or administrative barriers exist to implementing FSA options for the military?
Unlike many large employers, the U.S. military does not offer flexible spending account (FSA) options to members of the armed services and their families. Contributions to either a health care FSA (HCFSA) and/or dependent care FSA (DCFSA) reduce the amount of income subject to income and payroll taxes, thereby reducing the individual's tax liability. FSAs interact with other tax incentives in the U.S. tax code, potentially reducing or even eliminating the potential tax savings to individuals participating in an FSA. For service members to take advantage of an FSA, they must have eligible dependent care and medical expenses for themselves or their family members. For example, in the case of health care, most members would have few or no eligible out-of-pocket medical care costs associated with TRICARE.
This report presents an analysis — requested by the Office of the Secretary of Defense as input for Congress — on the implications of FSA options for active-duty service members and their families that would allow pre-tax payment of dependent care expenses, insurance premiums, and out-of-pocket medical expenses. The authors evaluate the benefits and costs of FSA options to active members and the U.S. Department of Defense (DoD), and present an implementation plan should FSA options be implemented by DoD. They also identified legislative or administrative barriers to these options.
Key Findings
Many members would have few or even no eligible FSA expenses under current law
- Because of the way in which DoD provides child care benefits, a potentially large share of military families may not have eligible dependent care expenses. Specifically, expenses for off-base child care subsidized by DoD are unlikely to be FSA eligible.
- In the case of health care, most members would have few or no eligible out-of-pocket medical care costs associated with TRICARE.
- However, HCFSAs also cover health-related expenses outside of TRICARE, including over-the-counter medication, eyeglasses and contact lenses, and orthodontia expenses.
- Enabling legislation would need to be passed to allow for payment of insurance premiums from FSAs by military personnel.
FSAs would confer a tax savings for many, but not all members with eligible expenses
- The HCFSA option would confer a savings to service members, but the DCFSA would not do so in all cases because FSA contributions interact with other components of the U.S. tax code, such as the Child Tax Credit and Earned Income Tax Credit. Therefore, FSA contributions affect how much of these credits can be claimed and the tax liability of the taxpayer.
FSAs would confer a cost savings to DoD but could result in large implementation costs
- The most substantial implementation cost would be that associated with upgrading the pay systems to support FSAs. The initial start-up costs associated with FSA administration and creating a training program for service members could be reduced because of the availability of off-the-shelf training materials.
Recommendation
- Changes in legislation that address inequity issues could increase participation among service members, if implemented. The ability to use FSA funds to pay for health and dental insurance premiums could expand the value of all FSA options to service members.
Table of Contents
Chapter One
Introduction
Chapter Two
Landscape of Dependent Care and Health Care Benefits Relevant to the Discussion of FSA Options for Military Personnel
Chapter Three
How Might FSAs Financially Benefit Active-Duty Members and Their Families?
Chapter Four
Estimating Tax Benefits of DCFSAs and HCFSAs
Chapter Five
FSA Costs and Savings to DoD and Total Savings to Members
Chapter Six
Implementation Plan
Chapter Seven
Discussion and Conclusions on the Feasibility and Advisability of FSAs for Service Members
Research conducted by
The research was sponsored by the Office of the Secretary of Defense and conducted within the Forces and Resources Policy Center of the RAND National Security Research Division (NSRD).
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