Changes to Flex Spending Accounts Could Hurt
WEDNESDAY, Dec. 8 (HealthDay News) -- It's the time of year for
holiday parties, gift shopping and open enrollment, when many
employees have to make decisions about their employer-sponsored
Last year's landmark health care reform legislation means
changes are in store for 2011. One of the most significant:
starting Jan. 1, you'll no longer be able to pay for most
over-the-counter medications using a flexible spending account
That means if you're used to paying for your allergy or
heartburn medication using pre-tax dollars, you're out of luck
unless your doctor writes you a prescription. (The exception is
insulin, which you can still pay for using an FSA even without a
Flexible spending accounts, which are offered by some employers,
enable employees to set aside money each month to pay for
out-of-pocket medical costs such as co-pays and deductibles using
"This is basically reverting back to the way FSAs were used a few years ago," said Paul Fronstin, a senior research associate at the Employee Benefit Research Institute in Washington, D.C. "It wasn't that long ago that you couldn't use FSAs for over-the-counter medicine."
Popular uses for FSAs include eyeglasses, dental and orthodontic
work, as well as co-pays for prescription drugs, doctor visits and
other procedures, explained Richard Jensen, lead research scientist
in the department of health policy at George Washington University
in Washington, D.C. Over-the-counter drugs became FSA "qualified
medical expenses" in 2003, according to the Internal Revenue
The way an FSA works is an employee decides before Jan. 1
(usually during the company's open enrollment period) how much
money to contribute in the year ahead. The employer deducts equal
installments from each paycheck throughout the year, although the
total amount must be available at all times during the year.
Typically, FSAs operate under the "use it or lose it" rule. You
have to spend all of the money placed in an FSA by the end of the
calendar year or the money is forfeited, Jensen explained.
Since generally speaking, the cost of over-the-counter
medications pales in comparison to the cost of co-pays and
deductibles, the 2011 change shouldn't be too onerous for
consumers, Jensen said. An analysis by Aon Hewitt, a human
resources consultancy firm, found that only about 7 percent of all
FSA claims in 2009 were for over-the-counter drugs, and just 3
percent of FSA expenditures went to buying these products.
The reason for doing away with the tax break is to help pay for
other goals of the health-care reform legislation, including making
sure that more Americans are able to get health insurance, and that
the insurance they get has more comprehensive coverage, Jensen
"If you take as a given that the point of health care reform is to cover as many people as possible, it's an equitable approach," Jensen said. "The tax break is regressive, meaning mainly middle- and upper-income people were benefiting from it."
One criticism, however, is there's the potential for people to
head to the doctor asking for prescriptions for drugs they used to
buy without one, a costly move, he added.
And an even bigger change is coming in 2013, when health reform
law will cap the amount that can be set aside in an FSA at $2,500 a
year. Beyond 2013, the limit will be indexed to changes in the
consumer price index.
While the law currently sets no limit on how much an individual
can put in an FSA each year, many employers already set their own
cap at $5,000.
The people who will feel the pinch then are those with chronic
health conditions who have lots of out-of-pocket costs, Jensen
The Hewitt Associates report, which looked at 220 U.S. employers
covering more than 6 million employees, found that only 20 percent
of eligible employees contributed to an FSA in 2010.
Of employees who contribute to an FSA, the average annual
contribution is $1,441 and the annual savings is between $250 and
$640 each year in federal taxes.
Only 18 percent of workers contributed more than $2,500 a year,
the maximum in 2013, and they tended to be high-income people
earning more than $150,000 a year.
The employee portion of insurance premiums are not payable
through FSAs. Some employers, however, set up plans in a way that
enables employees to pay premiums as well in pre-tax dollars,
IRS has more on the new rule.
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