President’s Plan Limits Flexible Spending Accounts

The overhaul of the U.S. health care system recently signed by President Obama sets severe new limits on the use of flexible spending accounts, including a $2,500 cap on FSA contributions and restrictions on using FSAs to purchase over-the-counter medications.

Although much of the president’s plan would phase in over time, many of these restrictions are set to take place next year, causing chaos to benefits-plan administrators and human resources departments throughout America.

Radical Changes

Jody Dietel, chief compliance officer at Wage Works, a San Mateo, California company specializing in health care plan administration, notes the “radical changes” to FSAs. She says the reform package passed by Congress on March 21 caps FSAs at $2,500.

“Currently there are no limits for FSAs, and employers often set a limit generally at $5,000,” said Dietel. “In fact, the state of California has a $5,000 max for their employees, the federal government has a max for its workers at $5,000 as well, so cutting that by $2,500 affects the government's own workforce.”

The health care overhaul also effectively eliminates the use of FSAs for over-the-counter drug purchases.

“I do not think that is good health care policy, as study after study shows over-the-counter drug purchases bend the cost curve: You do not have to go to the doctor and secure a prescription,” Dietel said.

Personal Tax Hike

Eliminating FSAs is likely to net the government $68 billion in additional revenue, according to Dietel. She says the government is looking at eliminating flexible spending accounts partly as a means of increasing its revenue stream.

Joseph Antos, a policy expert at the American Enterprise Institute in Washington, DC, believes FSAs are a good deal for Americans.

“Flexible spending accounts are good precisely because they take advantage of the tax system, a system which is fundamentally flawed,” he said. “They give people the opportunity to accrue additional tax benefits in securing health care. The question of what medical services actually cost is confused in our present system, but with FSAs we have further padding around the nerve endings of whether or not to buy something, and [in determining] if that something is of good value.”

Excise Tax Hike

Dietel notes the health care reform legislation also creates a 40 percent excise tax on flexible spending accounts that employers will have to pay if they offer an FSA to their employees.

“The excise tax is very problematic,” she said. “If I am an employer, I am not going to pay a 40 percent excise tax to have flexible spending account plan.”

Thomas Cheplick (thomascheplick@yahoo.com) writes from Cambridge, Massachusetts.