A while back I wrote about how our family had signed up for a Flexible Spending Account (FSA) through my workplace because it would allow us to save a decent amount of money on our tax bill by taking money out of my paycheck pre-tax in order to pay for our approved medical expenses.
While the FSA plan isn't necessarily a good idea for everyone because it is a use it or lose it type plan, we knew it was a good decision for us this year because we were anticipating having our first child, along with having other expensive medical procedures.
With the passage of Obama Care this year, we'll be seeing some changes to the FSA next year, and in years to come, that aren't necessarily going to make the accounts more attractive. In fact many are starting to say we should start calling them “In-flexible Spending Accounts”. They'll be limiting what types of things you can use the FSA to pay for, as well as how much you can contribute to the account.
Why the changes? In my opinion it's because they need more tax money to help pay for the Health Care Bill.
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Flexible Spending Account Changes In 2011
There main changes to FSA accounts in 2011 is in how the accounts can be used. In the past you could use the flexible spending account for any variety of over the counter (OTC) medications, including things like allergy medicine, cough syrup and band-aids.
Starting on January 1, 2011, flexible spending account participants will need a doctor’s prescription in order to use their FSA to pay for over-the-counter medications, ones that in the past have been OK to purchase with FSA funds without a prescription.
While this change may not seem like it's doing much because you can still purchase a lot of the same things, the effect it will have will be to effectively cut out a ton of the over the counter medication purchases because people don't want to go to the doctor to get a prescription for cough syrup. In fact, the Joint Committee on Taxation estimates that tightening up the tax break on over-the-counter purchases will generate an estimated $5 billion in federal revenues through 2019.
Flexible Spending Account Changes In 2013
The other big change that will be happening for FSA accounts is that the government will be capping the amount that you can put into your account. Most plans currently will cap contribution amounts to flexible spending plans at $5000. Beginning on January 1, 2013, contributions to FSAs will be capped at $2,500 per year.
By capping the amount to $2,500 the government hopes to collect quite a bit of extra tax revenue because not as much money can be used pre-tax to pay for medical expenses. The Joint Committee on Taxation estimate this change will allow the government to raise about $14 billion between now and 2019.
What The Change Means For The Average Family
For most employees, capping the funding limit at $2,500 won’t have a huge impact. According to Hewitt Associates, the average amount contributed to employee sponsored FSAs in 2009 was only $1,535, well below the $2,500 new limit.
The problem is the people that it does hurt are those who have severe health issues or large medical bills, are the ones that could use the tax break the most.
Tax Impact Of The New Rules: For a family who contributed $5000 to an FSA last year and are in the 28% tax bracket, the health care costs and taxes would increase $891 a year due to these changes. Figure out your own impact using the calculator found at savemyflexplan.org
Some Legislators Trying To Repeal The New FSA Rules
A bunch of legislators have recognized that the changes to the FSA rules may be harmful to a lot of people, and are aiming to have them repealed. Legislation introduced by Senator Kay Hutchinson and Representative Erik Paulsen (S. 3673 and H.R. 5126) would repeal the planned $2,500 contribution cap and requirement for patients to secure a doctor’s prescription in order to have OTC medications covered with an FSA. If you're in favor of having the changes repealed, you're advised to send letters to your congressional delegation. Check out this site for details.
What do you think about the changes to the Flexible Spending Account plans? Do you think they are necessary to fund health care initiatives, or do you think they should be repealed? Do you use a FSA currently? How much would you stand to lose due to these changes?
I think I’ll be stocking up on my OTC stuff before the end of this year!
Seriously, I don’t think it is that big of an issue. I know of no one who puts in more than $1500.00 I have never used it for otc. Copays, dentists, medical treatments took up the entire amount.
I put in $3000 this past year, and used it all up! The problem is, it may not affect some people that much, but the ones it does affect the most are the ones that need it the most as well, especially if the amount to contribute gets limited.
Thanks for writting up the changes on the FSA. I used it once or twice when I knew I had some bigger expenses, but I never approached $2,500. I should look into using it more… I don’t like the use it or lose it though. This year I tried a Health Savings Account. I don’t like the extra pressure of having to spend the money. :)
That really is one of the downsides to the FSA – that you have to spend it or lose it. I purposely try to be conservative so i don’t lose anything – but I hate losing the tax savings too!
Just for clarification, I believe this comment is wrong..
Tax Impact Of The New Rules: For our family, since we contributed $3000 to our FSA last year and are in the 28% tax bracket, our health care costs and taxes would increase $1070 a year due to these changes.
http://savemyflexplan.org/index.html asks you (at the bottom) to put in how much money you put in OVER the $2500 limit. Putting in $3000 means you only put in $500 more than the law would enable you too. For the family, $500 dollars not in the FSA means an extra whopping $178 a year, not the ~$1000 mentioned, according to the savemyflexplan.org
Thanks for catching that silly mistake. Put in an updated example.