BACKGROUND. Many large employers offer flexible spending accounts (FSAs) to
shelter their employees' out-of-pocket medical expenses from taxes and the
reby to encourage the purchase of health insurance policies with higher cos
t sharing. However, very little empirical research has examined the individ
ual 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 wil
l contribute to FSAs, and the amounts contributed by those with FSAs.
RESEARCH DESIGN. An observational study of randomly-selected employees in 1
5 Minnesota firms matched with information on the strategies those firms us
e 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 fa
RESULTS. Education beyond high school increases the probability that both t
ypes of subjects will contribute to FSAs, with marginal effects ranging fro
m 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 promo
CONCLUSIONS. FSAs are used mainly by high-income and highly-educated worker
s. We question whether this is an equitable use of the income tax code.