Should thighs touch the stomach to reduce flab?
I think that this is a bad advice you've heard (by many?).

For pedaling seated, the seat has only one position; the proper one. See How do I determine the correct position for my bicycle seat? for info on how to set it correctly.

Regarding the flab thing, as far as I know touching your stomach with your thighs (or any other part of your body) will not contribute to a better workout or a six pack. For that I guess you'll need lots of proper training and a consistently proper diet.