Washington, D.C. -- The U.S. Office of Personnel Management recently submitted a report to Congress offering the first look at the cost of administrative fees agencies will pay to cover employees enrolled in a flexible spending account.

OPM Director Kay Coles James noted the increased rates of participation in the program and said employees benefit from pre-tax contributions to flexible spending accounts (FSA), while agencies derive benefits from reduced payroll taxes that go well beyond the fees they pay on behalf of employees.

"Employees benefit because untaxed contributions from their salaries are deposited into their FSA accounts, and the lower employee taxable income translates into agencies paying out less in Social Security and Medicare taxes," said James. "And because agencies pay less in taxes, they more than recover the cost of paying FSA administrative fees."

James added: "Employees have embraced FSAs and have demonstrated both the ability and interest in using their hard-earned dollars effectively to manage health-care costs. Federal workers are well-informed, health-care consumers and understand the importance of FSAs."

The report says 28,356 employees opened a health-care FSA in 2003 and 7,003 employees had a dependent-care account. Following an enrollment period, 117,950 employees opened a health-care FSA for 2004, while 18,178 opened a dependent-care account. By 2007, OPM projects more than 283,000 employees will have health-care accounts and 43,627 will have dependent-care FSAs.

OPM's report, which includes projections of fee payments, says agencies will pay nearly $80 million dollars in fees through 2007 for employees who have a health-care FSA, dependent-care FSA, or both. OPM sponsors the FSAFEDS program.

In 2003, the report says agencies paid $652,000 in health-care FSA fees,and $287,594 in dependent-care fees. Fees to be paid in 2004 will increase significantly, to more than $5.6 million and $980,000 for health-care and dependent-care FSAs, respectively. The fee increase is due to two factors: 2004 being the first full year in which the FSA benefit has been available to federal employees, and enrollment in FSAFEDS rising nearly 400 percent between 2003 and 2004.

In June 2003, after consultations with agency leaders and employee groups, James urged agencies to cover the cost of employee administrative fees. She maintained that the responsibility for paying the fees would be another tool in agencies' arsenal of benefits that would help them recruit and retain outstanding people. President George W. Bush later signed the National Defense Authorization Act for Fiscal Year 2004, which contained a provision requiring agency payment of FSA fees.

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