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Flexible Spending Accounts Will Be More Limiting

April 19, 2010

healthcare costsEmployees who take advantage of flexible spending accounts, or FSAs, will face new restrictions that will impact the amount of tax-free dollars they may use to pay for health expenses.

FSAs--which allow employees to use pre-tax dollars to pay for out-of-pocket medical costs such as deductibles and co-pays--have long been touted as a valuable tool for consumers, reports The New York Times. According to Jennifer Calhoun, a principal with the consulting firm Mercer Health and Benefits, using an FSA can reduce one's overall healthcare costs by as much as 20 percent.

But the new federal healthcare legislation will reduce the amount of money employees can contribute to these accounts and will limit how the funds can be used: Starting January 1, 2010, FSAs will have annual limits of $2,500 per year. And beginning January 1, 2011, participants will no longer be able to use the funds for purchasing over-the-counter medical supplies that are not prescribed by a doctor.

"When the new limit comes in, I'll be paying more out of pocket and losing the tax break," noted Susan Luskin of Florida, who has Crohn's disease, an inflammatory intestinal condition, and was interviewed in the Times. "People on a tight budget who are ill will feel the difference."

Sara Collins, vice president for the Affordable Health Insurance Program at The Commonwealth Fund, explained to Bankrate.com that the new law isn't intended to discourage the use of FSAs.

"It's designed to bring some balance back into the tax code and make sure those dollars are used for medical purposes," she said. "You can still put money aside in these accounts, there just won't be quite as big of a tax break."

Edwin Park, a senior fellow at the Center on Budget and Policy Priorities, further explained that since the FSAs require people to "use it or lose it" within the plan year, employees often scramble at the end of the year to purchase items they don't need.

"It's encouraging a whole host of services whether they were medically needed or not," he told National Public Radio. The new guidelines, he said, are meant to prevent that.

Not everyone agrees. Jon Antos, a health economist with the American Enterprise Institute, pointed out that the change will raise revenue for the government by cutting down on the amount of money that employees can set aside without being taxed.

"It's a revenue raiser," he was quoted as saying by NPR. "There's nothing sophisticated about it at all."


Compiled by Yaffa Klugerman

Sources:

"Flexible Spending Accounts Getting Slightly Less Flexible," National Public Radio, April 5, 2010, Andrew Villegas

"Flexible Spending, a Little Less So," The New York Times, April 16, 2010, Walecia Konrad

"How Health Care Reform Changes FSAs, HSAs," Bankrate.com, April 14, 2010, Claes Bell

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