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.