Health care plan includes FSA changes – tax increases

Proposed health care legislation would limit payroll tax-free contributions for Flexible Spending Accounts (FSAs) to $2,500 where there was no federal limit before. This could be a large tax increase for families with ongoing medical expenses and/or providing expensive dependent care.

Here is the language currently included in HR 3962, the bill that has passed in the U.S. House, with my emphasis added. Similar language is in the Senate version.

Part 3, Section 531
(f) Reimbursements for Medicine Restricted to Prescribed Drugs and Insulin- For purposes of this section and section 105, reimbursement for expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug or is insulin.

Part 3, Section 532
(1) IN GENERAL- For purposes of this section, if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement.

Although most employers do limit contribution amounts, I’m familiar with two Fortune 50 companies who currently limit contributions to $7,000 per year. Other companies have even lower limits, and the average contribution seems to be less than $1,500.

If you’re willing to deal with wading through the regulation involved, you can currently save about 25 to 30 percent on that monthly bottle of ibuprofen, over-the-counter allergy medication, acupuncture, birth control pills, eye glasses, and even saline solution for your contact lenses.

But Section 531 – as shown above – would limit benefits to only prescription drugs, and Section 532 limits the contribution amount to $2,500 per year.

There are a significant number of medical expenses – including abortion – that can currently be paid for with the tax-free contributions to an FSA. If a life-changing event happens in your family and you need to install a ramp for wheelchair access to your home or maybe make your bathroom fully handicapped accessible, you can use FSA dollars to pay for those expenses.

Those examples aside, many families have ongoing expenses to care for a disabled child or family member and use FSA dollars to help with family budgeting. Implementing the health care legislation could mean a tax increase of more than $1,000 per year for these families.

Many in America do not take advantage of FSA programs and the tax advantages they provide, but my guess is those who would be most impacted by these changes are those families with ongoing health care expenses.

So, who would benefit? Nobody would benefit from the changes in Sections 531 and 532. Nobody! The only thing this part of the health care legislation might do is increase the federal government’s tax revenue. The politicians and their slush funds never seem to suffer.

More about Flexible Spending Accounts

  • You need to use the money or you loose it. This makes an FSA an important part of a families budget if they have ongoing expenses during the year. As an example, if you have a nurse providing home services once per week for your disabled child and it costs $100, that expense could be paid with FSA dollars. By planning ahead and putting in $5,200 into an FSA, you can pay that nurse with tax-free dollars from your FSA
  • Employers generally do limit contributions since you have access to the full amount at the beginning of the coverage period. If you know you need to remodel a bathroom to make it handicap accessible, you can get it done and paid for immediately. The accounts are pre-funded by the employer. This is generally the reason the employer limits contributions, since employees are contributing to the fund each pay period.

I’m not sure if I would have been – or am – in favor of FSAs. Without a doubt, you have to jump through all sorts of hoops to take advantage of the program, but the law has been on the books for years and taking away the benefit now does not sit right with me.

Kind of reminds me how Democrats took away the popular school voucher program from the kids in Washington, D.C.

If I had to provide advice, I’d lean more to having a Health Savings Account (HSA) since you can roll over money into future years tax free (you don’t loose it) and you can earn interest on the account. The drawback is HSAs are not pre-funded by your employer.

Leave it to the federal government to make this as confusing as possible.