Changes To Flexible Spending Accounts On the Horizon

A few months ago, the health care reform discussion was all the rage and dominated most news stories that were centered around politics.

Now that it’s been passed, I think people have moved on.  Most political discussions I hear of now seem to focus either on the upcoming elections or the government’s (lack of) response to the oil spill.

However, I thought it was noteworthy to go back to health care and point out a couple of pretty major changes to those that use flexible spending accounts to save money on health care related costs.

A flexible spending account, for those who may not be familiar, allows you to set aside pre-tax dollars that can then be spent on reimbursable health care costs, including co-pays, non-covered costs, prescriptions, and other items.  This essentially gives you a ‘discount’ equivalent to your marginal tax rate on health care costs.

So, what are the changes/

While I’m sure there are others, there are two that I was surprised about that I think will impact quite a few people:

  • Over-the-counter (OTC) medications will no longer be covered – Many OTC medications and items are currently covered as reimbursable items.  So, right now if you sprain your ankle, and hobble into the drugstore to get an Ace bandage and some Motrin, you can swipe your FSA card, and pay for this.  Beginning next year, this will no longer be the case.
  • FSA contributions will be capped – Right now, many employers will cap FSA contributions at their discretion, but with the new changes, FSA contributions will be capped at $2,500 per year.  I’m not certain on this, but I think this one has a couple of years before it’s implemented (2013 is what I’ve heard). So, if you have out-of-pocket costs over $2,500 and you’ve used a flexible spending account to reduce some of these costs, be prepared to pay more.

Both of these are examples of indirect taxes.  With this model, the government doesn’t directly raise your taxes through an increase in payroll deduction, but by moving things from the ‘pre-tax’ side of the fence to the ‘taxable’ side of the fence, they’ll end up collecting more revenue, revenue which was included in the cost factors that were part of the ‘Obamacare’ bill.

For us, the OTC will mean the biggest change.  It’s nice to be able to buy medicines, bandages, or other supplies, and have them payable by the FSA card.  Since FSA monies don’t roll over from year to year and they’re ‘use it or lose it’, the OTC coverage has allowed people to avoid losing money that they contributed.  Since FSA contributions are often a ‘guessing game’, you might end up with money at the end of the year.  If you have $100 remaining, why not go to the drugstore and stock up on some bandages, cold medicine, nighttime medicine?  Everybody wins, right?  Well, yeah, except the government who was looking at those missed tax revenues.

Were you aware of these changes or did the politicians do a good job at ‘sneaking these in’?  How will these changes affect you?

3 thoughts on “Changes To Flexible Spending Accounts On the Horizon”

  1. I wasn't aware of the changes per se. We typically put 3700-4000 in our FSA, and use every penny. It will stink if they cap it at 2500. (oh, and this is all insurance co-pays and such…not OTC!!)

    Bummer. We usually end up right around 7.5% of our income, and with the FSA, you can't double dip, so we can't deduct our med expenses. Maybe this year we will. But I doubt the benefit will be as great as having the money pre tax.


  2. I do use FSA and heard about the OTC changes a couple months ago. While it was nice to have that perk, it's only been in recent years that it was available anyway. And it was a hassle to send in the receipts.

    There will be a lot fewer people using it, however, if they can't get rid of the "use it or lose it" clause. I'd rather roll over from year to year to help with the really unexpected deductibles.

  3. Monroe, I've never had to submit receipts for my OTC purchases, but I usually make my purchases at an 'eligible' store like CVS, Walgreens, or Meijer, and they have it in their inventory which are 'FSA eligible' items. I just swipe my FSA card and I'm never asked to submit a receipt.

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