PUBLIC EMPLOYEES� BENEFIT BOARD

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                               PUBLIC EMPLOYEES’ BENEFIT BOARD
                                            August 15, 2006
                                 Report on Flexible Spending Accounts

This report provides an overview of the PEBB dependent care and health care flexible spending
accounts for 2005 as requested by the Board.

PEBB Members Enrolled in Flexible Spending Accounts

 Average Monthly Enrollment                    According to the May 2006 Census Report, PEBB
                 2005 2006                     has 45,957 active employees enrolled in medical
Dependent Care     807   838                   plans and potentially eligible to participate in one or
Health Care      1,690 2,692                   both of the flexible spending accounts.
Total            2,497 3,530
                                               2006 Percentage of eligible employees enrolled:
Approximately 70% of the 2006
increase in health care accounts                Dependent Care:     Less than 2%
is attributable to the Kaiser Incentive.       Health Care:         less than 4%

Members may elect to contribute up to $5,000 annually in each account. PEBB has not
implemented a minimum allowable contribution.

                             Member Monthly Contributions to Accounts
  Account              $50 or    $51 to     $101 to      $201 to      $301 to       $401 to
   Type                 less      $100        $200         $300        $400           $416
Child Care              4.9%       8.1%      13.6%        16.1%         13%          44.3%
Health Care            43.8%    30.54%       17.4%             8.3% over $200 to $416

Administrative Costs
BenefitHelp Solutions (BHS) receives $3.50 per member per month to administer the flexible
spending accounts on behalf of PEBB. PEBB is charged only one administrative fee of $3.50 if
the member has both a dependent care and health care flexible spending account.

 Account Type               2005 BHS
                         Administrative Cost
Dependent Care                       $46,213
Health Care                          $67,452
Total                              $113,665

Revenue
The revenue to administer the flexible spending account program comes from three sources:
member account forfeitures, stabilization funds, and interest earned on funds held in this account.
    Forfeitures
          Account Type           2005             Percentage of total
                             Forfeitures        contributions forfeited
        Dependent Care            $15,621 Less than ½ of 1%
        Health Care                $6,684 Less than 1/3 of 1%
        Total                     $22,305
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      2005 Interest Earned: $33,449

      Stabilization Funds: PEBB deposited $200,000 into the PEBB FSA account in
                            November 2005.

Comparison of Cost to Revenue                                         Per IRS regulations,
                                                                     employees may submit claims
Total BHS Administrative Cost for 2005              $113,665         to their health care account
Total Forfeiture Revenue            $22,305                          and receive reimbursement up
Total Interest Earned               $33,449                          to the maximum annual
Total Revenue                       $55,754                          election amount at anytime
Difference Between Revenue and Cost                                  during the year. This can
(Cost to Stabilization Fund)                        ($57,911)        result in overpayments (the
                                                                     employee receives
 Savings to State Agencies                                           reimbursement and does not
State agencies realize at the agency level FICA savings based        have funds in their account).
on the amount deducted from the employee payroll for                 The employer cannot require
contribution to either a dependent care or health care flexible      the employee to repay the
spending account. The FICA savings are 7.65%                         overpayment.
(6.20% from Social Security and 1.45% from Medicare).                Overpayments Cost to PEBB:
     2005 FICA Savings realized by agencies: $400,081               $54,527

Considerations for Future Planning

Impact of Grace Period
The Board elected to implement the federally allowable grace period for both the dependent care
and health care flexible spending accounts beginning with the 2006 plan year. The grace period
allows members to submit claims for the first 90 days in a new year (January 1 – March 31) for
eligible services received during the first 75 days of the new year (January 1 – March 15) against
the balance of funds in their account from the previous year.

      Estimated impact on Forfeitures: 33% decrease for the first year of the grace
       period

      BHS administrative cost: Increase of .25 cents per member per month ($3.75)
       This rate becomes effective on January 1, 2007, and is applied to all members and all
       accounts every month for the full contract period.


Projections
At this time PEBB staff is projecting that sufficient cash will be available to cover the BHS
administrative costs only until the end of 2007. The projections are subject to change based on
variables such as, the number of participants, including the extent to which employees receiving
the Kaiser Incentive continue; the amount of individual deposits which affect PEBB Treasury
Interest Earnings; and the estimated impact of the grace period on forfeitures.


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