Flexible spending accounts (FSAs) and the Patient Protection and Affordable Care Act

Flexible spending accounts (FSAs); sometime called reimbursement accounts have been a popular benefit for many years.  The ability to put money aside on a pre-tax basis helps employees manage health care costs as co-payments increase and encourage employees to voluntarily accept greater risk for out of pocket costs by electing to enroll in plans with higher deductibles thereby encouraging more efficient use of health care.  While there is no legal limit on the amount that can be placed in an FSA, most employers’ limit them to a $5,000 annual election.  Some employers lowered that amount several years ago when the law changed placing employers at risk for the entire amount selected by the employee regardless of the actual amount contributed by the employee at any point in time.  This fear proved unfounded, but still resulted in some lower plan limits.

Under the Patient Protection and Affordable Care Act, flexible spending accounts are limited to an annual contribution of $2,500 beginning in 2013. Some will argue that this benefit is unfair because only individuals working for an employer who provides such a plan can benefit, but any employer can establish such a plan at very little cost.  In Massachusetts, employers are required to establish an FSA as part of the strategy to make health care more affordable.

Lowering the limit is designed to save money because the amount of tax-free income is less.  On the other hand, as a consequence of this change some workers will elect a plan with lower deductibles and lower out of pocket risk, which converts money paid as medical claim reimbursement to tax-free income. 

Some families will be significantly harmed by this change, as their out of pocket costs will rise. Especially vulnerable will be young families with children using orthodontic services.  Orthodontic benefits are typically limited under dental plans (if such a benefit exists) with relatively low lifetime maximums. Using the FSA for thousands of dollars in charges for each child over several years is a significant help.  Not only are tax dollars saved, but also the periodic payroll deductions and the ability to collect reimbursement as claims are incurred without advance out of pocket costs is a great help in managing a family budget. 

FSAs are also helpful for eye care where coverage for routine eye exams and the cost of glasses is far less prevalent and when available typically has limited benefits. Here again the young family with small children is most adversely affected. 

Employers providing an FSA should communicate these changes to their workers now.  Even though the change is three years away, alerting employees may help them plan for some of these major expenses.  Accelerating the start of orthodontic care or even laser eye surgery may be an option for many people.

This change is just one of many revenue-raising components of health care reform that will affect people with coverage and hits the middle class more than any other group.  While it may not be called a tax increase, the result is nevertheless a smaller net paycheck.

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