Changes to Flexible Spending Accounts in the Health Care Bill

This is a guest post by Kelly Glannon.

As a result of new legislation, flexible spending accounts are getting a little less flexible. Whereas in past years money kept in a flexible spending account could be used to buy over the counter drugs like Tylenol, beginning next year such purchases will be restricted. Unless you have a prescription for it, OTC medicine will not be covered. Another major change is the cap on the amount of money that can go into a FSA is being reduced from $5,000 to $2,500.

A flexible spending account, also known as a flexible spending arrangement, is an account in which pre-tax money is stored that can be spent on certain eligible health expenses. The money can be used on things such as doctor visits, eyeglasses, prescription medication, and until recently some over the counter medicine as well. By using pre-tax money, the accounts provide an easy way to save money on healthcare expenses. Any money not used by December 31st, however, is forfeited to the employer.

Similar in structure to health savings accounts, FSAs tend to be loved by conservatives and less liked by liberals. Now, left-leaning lawmakers argue that FSAs were necessary for many people before health care reform passed, but say their importance is reduced now that the government is stepping in to assist people in paying for health care. On the other hand, conservative economists argue that the freedom to circumvent taxation is crucial for reducing national health care spending, so lowering the cap on the amount of money that can be put into a FSA is a bad idea. The truth about the new rules is somewhere in the middle, and there are a few definite pros and cons.

The Pros – Reducing Unnecessary Spending

The argument in favor of the changes goes like this: the present situation encourages wasteful spending on heath care. Because money in a FSA is essentially lost if not used by the end of the year, many people scramble at the end of the year to buy medications they probably don’t really need. Because what’s left in the account can’t be rolled over from one year to the next, there’s a built-in incentive to consume more health care resources, in order to get what you’ve paid for.

According to Edwin Park of the Center on Budget and Policy Priorities, lowering the cap on what can be put into a flexible spending account will lower the cost of insurance and overall national health care expenditures by reducing the incentive to buy unnecessary drugs and make unnecessary physician appointments. The money saved by reducing the amount of wasteful spending can be redirected to subsidize the cost of insurance while lowering the costs of providing necessary health care for insurance companies.

The Cons – More Taxes

It’s true. The money put into a flexible spending account isn’t taxed before it’s taken out of your salary, so lowering the limit on the amount of money that can be put into a FSA will increase the percentage of some people’s salaries which are being subjected to payroll taxes. According to the Joint Committee on Taxation, roughly $18 billion will be generated by the federal government over the course of the next decade because of this. In addition, lowering the cap from $5,000 to $2,500 will shift some families into a higher tax bracket.

Conservatives argue that covertly hiking taxes is the whole point of the legislation. The people who receive the most benefit from a FSA are people who live with a chronic illness, and the average out of pocket cost for a chronic illness is roughly $4,398. Most people participating in FSAs aren’t extremely wealthy, either; the average income of FSA participants is about $55,000 a year.

So what do you think? Has the new healthcare legislation made flexible spending accounts obsolete? Or is lowering the cap on contributions just a way for the government to raise revenue?

Kelly Gannon is a content editor for Just Eyewear, an online glasses retailer. She writes on topics including current events, healthcare, and personal finance.

{ 10 comments… read them below or add one }

1 Jenny April 16, 2010 at 7:31 pm

Thanks for this article! We just starting using a FSA this year and I'm kicking myself for not doing it earlier. I don't want to see these changes made because it'll be taking money away from my family but we'd survive.


2 LittlePeopleWealth April 17, 2010 at 2:59 am

We used a FSA as well, but honestly I wish we could use an HSA! I couldn't go into that plan this year since I had the little one in February (it would have been a really high deductible). HSA's are so much better than FSA's though.


3 AB April 22, 2010 at 7:30 pm

Thanks for this article! I just created my own health care guide for the younger set of Americans, feel free to check it out at


4 LittlePeopleWealth April 22, 2010 at 8:18 pm

Thanks Allison, the gen Yer's definitely have their own set of issues since you have to get a job with full health coverage in order o get insurance in this country. There is always a period of time where you are out of school and do not have a job that offers coverage and that can be a big problem!


5 Elizabeth June 12, 2010 at 4:23 am

Lowering the cap is a terrible idea! We used to use FSAs. (Now we have an HSA — It is better!) Most families calculate their needs ahead of time and underestimate to avoid "wasting" money. That is what we did. It really hurts families, especially large families, to put a cap on it. Our deductibles alone can exceed $2,500. And we use significantly more OTC products. I cannot imagine that this will help pay for health care, because it was our money to begin with. Insurance companies did not pay any part into our FSA. It is taken straight from our paycheck and used to cover items NOT covered by insurance. The only way it could "pay" for health care is through more taxable income. HSAs are awesome. They are just like FSA's, but it is your money — rolls over every year. My husband's employer also contributes $1,000 to it every year too. HSAs and more plan options would help Americans with real health care costs.


6 LittlePeopleWealth June 13, 2010 at 9:39 pm

I wanted to get an HSA, but we weren't eligible this year so I did an FSA. HSA's are a lot better. We did lose money to it one year though. I don't think they are saying that lowering the limit will pay for health care though (although there would be more taxable income). Maybe they are just trying to push more people toward an HSA??

I wish everybody was eligible for an HSA.


7 Da'ud November 2, 2010 at 8:55 pm

My coworkers thought someone had died when they saw my face this morning. I was appalled to find out the changes, half as much and no OTC, in the FSA. Then I realized that if these are Tax deductible I just need to continue keeping the receipts for the year then put it on the tax return next year. As for being out of school and not yet at a job w/ good health care, you can now stay on your parents until you are 26.


8 LittlePeopleWealth November 3, 2010 at 4:50 am

Thanks for visiting Da'ud. It is great that you can stay on your parents health insurance until you are 26. "kids" are going to have trouble getting on insurance since fewer jobs are offering it for their new employees.


9 Donald Quixote October 7, 2013 at 2:49 pm

Staying on insurance till 26 can be healthy but you definitely need to be careful in waiting to get your own insurance. While you are young and healthy you can get much cheaper insurance rates and ride them for a number of years.


10 Heidi October 14, 2013 at 5:31 pm

that is definitely true if you have to purchase your own policy!
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