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 (as opposed to a Health Savings Account (HSA) that goes along with a High Deductible Health Plan), we knew it would be a good idea for us last year as it would mean upwards of $1000 in tax savings for us due to costs associated with the birth of our son, and other procedures we knew would have to be done. We actually could have saved more if we hadn't been scared by the whole “use it or lose it” asterisk of the plan type because we ended up paying closer to $5000 in eligible medical expenses for the year.
With the passage of Obama Care last year, we’ll be seeing some Flexible Spending Account changes in 2011 that will mean the accounts become even more restrictive in what you can use them for. Some of the main changes to the accounts include that they’ll be limiting what types of things you can use the FSA to pay for, and in future years they'll be restricting how much you can contribute to your FSA.
Why the changes? Because they need more tax money to help pay for the Health Care Bill, and the FSA only allows you to save on your taxes.
2011 Flexible Spending Account Changes
The main change that we'll all be seeing to FSA accounts in 2011 is in how the money you have allocated can be spent. In 2010 and years past you could use your FSA for a large number of over the counter (OTC) medications, including things like allergy medicine, cough syrup and band-aids.
Starting on January 1, 2011, the FSA will now require you to get a doctor’s prescription in order to use the FSA to pay for over-the-counter medications. Things that in the past may have been OK to buy with FSA funds without a prescription, will now require a doctor's note.
Some people say that this change won't have much of an effect because you can still use your FSA to buy a lot of the same over the counter meds. The problem is that if you now have to get a prescription in order to buy the items, most people aren't going to bother to do it. The Joint Committee on Taxation estimates that requiring people to get a prescription on over-the-counter purchases will generate an estimated $5 billion in federal revenues through 2019. No wonder they're doing it.
2013 Flexible Spending Account Changes
While the changes to purchasing of over the counter meds is the big change for 2011, there are other changes that will be happening for FSA accounts in coming years. For example, the government will be lowering 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.
Since the pre-tax contribution to your FSA is capped at only $2500, that would mean a lot of people wouldn't be able to take advantage of the FSA over that amount, and the tax savings over that number would be lost. If you have a year where you spend a lot on medical expenses, you could be out of luck. For example, if we had been capped at $2500 last year, we would have lost another couple hundred in tax savings in 2010.
The Joint Committee on Taxation estimate this change will allow the government to raise about $14 billion between now and 2019.
Monetary Impact Of FSA Changes
For most people the change this year will have the most impact because it will mean added hassle and less tax savings because they wont' be able to buy as many OTC medicines. In 2013 when the amount is capped at $2500, it will have less of an effect because not enough people add more than $2500 to their account. 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 that I see with the new rules is that the people they will hurt the most are the people who most need the tax breaks. The families with large medical bills and lots of medications to buy.
How Would New Rules Impact You?: My family contributed $3000 to our FSA last year and are in the 28% tax bracket. Under new provisions our health care costs and taxes would increase $1070 a year due to these changes. Figure out your own impact using the calculator found at savemyflexplan.org
What do you think about the changes to the Flexible Spending Account plans? Will the changes mean that you're less likely to fund one? Which one will have a larger effect, the dropping of over the counter medication coverage or capping the amount people can put in? Tell us your thoughts in the comments.