insurance

How health care reform changes FSAs, HSAs

Highlights
  • FSAs allow employees to sock away tax-free dollars for medical expenses.
  • Starting Jan. 1, 2013, FSAs will have annual limits of $2,500 per year.
  • Tax-free contributions to HSAs and Archer MSAs will still be unlimited.

If you pay for medical care out of a tax-advantaged account such as a health savings account or flexible spending account, passage of the new health care reform law might make these so-called cafeteria plan benefits such as FSAs and HSAs a little less tasty when it comes tax time.

The new law reduces the amount of money you can contribute to these accounts and shelter from Uncle Sam's reach. It also creates stricter rules about how the dollars you put away can be used. These new rules and penalties are designed to generate revenue to offset the cost of the health care reform law's health insurance tax credits and other spending.

Cafeteria plans are so named because they allow employees to choose from a list of benefit options much like a cafeteria menu. Among those options are health care spending accounts.

Flexible spending accounts, or FSAs, allow employees to sock away tax-free dollars that can be used to pay for medical expenses such as drug co-pays, deductibles and treatments not covered by insurance plans. Up until now, there hasn't been an official limit to how much you could contribute to an FSA, although IRS rules dictated that employers create some kind of maximum contribution. Many employers cap the amount in the $2,000 to $5,000 range according to a 2009 report by the Center on Budget and Policy Priorities in Washington, D.C.

Starting Jan. 1, 2013, FSAs will have annual limits of $2,500 per year. Going forward, the limit will rise annually based on the rate of inflation. Still, it likely will remain above the average employee contribution, which was $1,424 in 2009, according to Mercer's National Survey of Employer-Sponsored Health Plans, an annual report on health care benefits.

In addition, FSAs will remain "use-it-or-lose-it" accounts. That is, any unused balance for one year can't be used to fund health care spending in the next year.

New restrictions on how you can spend FSA funds will change more quickly. Starting Jan. 1, 2011, you won't be able to spend FSA dollars on over-the-counter medical supplies that aren't specifically prescribed by a doctor, putting a damper on the annual ritual of FSA holders trying to spend unused funds by stocking up on their favorite over-the-counter medicines.

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Despite the new limits, the law isn't intended to discourage the use of FSAs, says Sara Collins, vice president for the Affordable Health Insurance Program at The Commonwealth Fund, a health care research foundation in New York.

"It's designed to bring some balance back into the tax code and make sure those dollars are used for medical purposes," says Collins. "You can still put money aside in these accounts, there just won't be quite as big of a tax break."

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