Obamacare strikes again: New limits on spending accounts
The chairman of the Congressional Health Care Caucus decried new limits on Health Care Flexible Spending Accounts as another example of President Barack Obama’s health care reforms hurting regular people.
These accounts allow people to pay for eligible expenses with pre-tax dollars and can be applied to certain health care, dependent care and work-related parking and transit costs.
“As people find out that a tool that they had to use to lower their health care costs—and they’re losing a part of it, I suspect people are going to be fairly disgruntled,” said Rep. Michael C. Burgess (R-Texas), a licensed physician, who represents a district in suburban Dallas.
“It’s been pretty popular, I’ve used it myself and made it available to my employees when I ran my medical practice,” he said.
“It’s a way for people to put some money aside, pre-tax from every paycheck, for your designated medical expenses,” he said. “The disadvantage is that if they don’t use it by the end of the year, it goes away—I always felt that was unfortunate that it did not rollover.”
“It is just another example of something Obamacare does and it has no business going there—it is a relatively small offset,” he said.
“Why do that?” he asked.
“You’re just moving dollars around—why not leave people in-charge of their own money? They make better decisions than the government anyway,” he said.
“The FSA turned power back to the purchaser, the patient, that’s where it belongs,” he said.
Jody Dietel, the compliance officer for WageWorks (WAGE-NYSE), a San Mateo, Calif.-based human resources and compensation company, said the changes to the Flexible Spending Accounts are not good health care policy.
“Sadly, because you can only use them for health care expenses, the limit is really going to affect those who really need it the most,” she said. “It will hurt people with chronic illnesses, special needs kids, people with autism, so it’s not really a health care friendly policy—it was a revenue grab,” she said.
The new restrictions mean higher taxes on working Americans and less control over how they manage their own health care and other decisions, she said.
FSAs have been helpful
“Health Care Flexible Spending Accounts are part of a plethora of options available to help working Americans deal with out-of-pocket health care costs, which are obviously a bite out of any family’s budget,” she said.
“There’s an alphabet soup of different options,” she said.
A Flexible Spending Account allows workers to put aside money from their paycheck for health care expenses not covered by their health insurance. Because the money is pre-tax, whatever the amount of the contribution is deducted from the participant’s taxable income. Neither is it a taxable event when the participant withdraws the funds for an authorized medical expense.
The limit on contributions is a tax increase because it exposes more income to taxation, she said.
“You save anywhere from 25 cents to 40 cents on every dollar you use in the flexible account because of the tax protection,” Dietel said.
“Flexible Savings Accounts were under attack during the health reform discussion, only because Congress was looking for a way to pay the bill,” said Dietel, who uses her FSA to finance her battle against diabetes, asthma and high blood pressure, and in the process lost 200 pounds.
“So, everybody had to kick in,” she said.
New federal savings limits
“Starting Jan. 1, for the first time in our history, there is a limit on how much Flexible Spending Account participants can put into their account,” she said.
The limits are now set at $2,500, she said.
Before the enactment of the Patient Protection and Affordable Care Act, some employers had set limits on employee contributions, but it was never addressed in law, she said. “They were anywhere from $3,000, $5,000, $10,000 or even $20,000—I’ve seen. The most common limit was $5,000.”
“The [Affordable Care Act], also across-the-board, requires a prescription requirement for over-the-counter drugs and medicines in order for them to be payable under any health care plan,” she said.
Instead of using one’s Flexible Spending Account to pay for aspirin, for the purchase the participant would need to visit a doctor and if the doctor writes the prescription for an otherwise non-prescription medicine, the purchase can be charged against the FSA, she said.
“Again, it was not because these made good health care sense, it was done to raise money for ‘affordable care,’” she said.
One group really hurt by the new law is families with special needs children, Dietel said.
Regina M. Levy, a certified public accountant in Los Angeles, said the IRS allows parents to use money from their Flexible Spending Account to pay for tuition at private schools that are tailored for special needs children.
“There has to be a medical reason for the child to be at the school,” she said.
“If there is a medical reason, then the education is considered incident to the treatment and the tuition becomes part of the medical expense,” she said.
Because of the new limit on contributions, families will continue to use their Flexible Spending Accounts, but it will be for other items, since the lower limit cannot begin to cover the cost of a private special needs school, she said.
From the vantage point of WageWorks, which administers compensation programs for employers, there has not been the blowback from consumers she and others expected, Dietel said.
Data suggests that people are going to their doctors for these types of prescriptions, despite the cost and hassle of an office visit, she said.
“Health care is complicated and patients see this as one more complication,” she said.
New caps on certain expenses
Natasha T. Rankin, the executive director of the Washington-based Employers Council on Flexible Compensation, another problem with how the Affordable Care Act deals with Flexible Spending Accounts involves new caps on out-of-pocket expenses.
Individuals and families, who saved money on premiums by choosing health insurance plans high-deductibles, could use Health Care Flexible Savings Accounts and Health Savings Accounts and other similar vehicles to close the gap, she said.
The PPACA caps individual out-of-pocket expenses at $6,000 and families at $12,000, she said.
These caps leave a gulf between the maximum allowed deductible and the $2,500-maximum contribution to the Health Care Flexible Spending Account, she said.
The new limit on contributions has led Dietel, Rankin and other advocates for Flexible Spending Accounts to seek the IRS to reverse its use-it-or-lose-it rule that forces participants to either use all the money that set aside in an HCFSA by the end of the year, or forfeit the money.
Rankin said 75 percent of working Americans are eligible for Health Care Flexible Spending Accounts, but only 25 percent take advantage of the program.
That is 100 percent of the problem, she said.
Use it or lose it rule
The main reason people do not participate is the use-it-or-lose-it rule, she said.
Dietel said the use-it-or-lose-it rule also encourages wasteful spending.
“Everyone gets their balance on Dec. 1 and goes out and buys Band-Aids,” she said. “It’s why eyeglass stores stay open late on Dec. 31.”
Dietel said the case was made to the IRS that changing the rule would make good policy sense.
Burgess said the main reason he supports Health Savings Accounts is their rollover feature.
“With the rollover aspect, when you start to put together several years together—that’s when you start to have some real purchasing power with the patient—the health care consumer,” the Texas congressman said.
Burgess said he when he practiced medicine, he did have a rooting interest in the use-it-or-lose-it.
“In the interest of full disclosure, as a physician I learned not to take vacation in December,” he said.
“People would have the FSA’s that were flush with cash and they wanted to get their money’s worth before the end of the year,” he said.
“Some Decembers, I almost couldn’t operate fast enough to accommodate all the people, who had postponed things and wanted them done before New Year’s Eve,” he said.
“But, as a provider, I can see the upside to having people have to spend all their cash before the end of the year; it made for a busy end of the year for me,” he said.
In addition to the eyewear stores, the congressman said the Lasik providers and plastic surgeons all did great business at the end of the year helping individuals drain their FSA’s to zero.
IRS could change rule
Dietel said use-it-or-lose-it rule is a just regulation written by the IRS, it can be changed or deleted without congressional action with a penstroke.
“We were successful enough to get them to think about it enough, so that in IRS Notice 2012-40, they asked for comments about if they should modify the rule and how should they modify it,” she said.
“There were more than 1,000 comment letters were received by IRS and Treasury,” she said. “Nearly all of them were in favor of lifting use-or-lose.”
There might have been a negative comment from an eye glass store association, and there was great variety about how make the changes, she said.
“We’re hopeful that IRS and Treasury will think about it, modify or eliminate use-it-or-lose-it rule, because it is ridiculous,” she said.
Dietel said there is no time frame for the IRS to make its decision after it asks for comment.
“We would like it as soon as possible because the accounts are under-utilized people don’t set aside enough money,” she said.
First, people are afraid to commit funds they might lose at the end of the year, she said. “Second, in these times nobody can afford to lose any money.”
Allow rollover year-to-year
Rankin said she believes there is bi-partisan support on Capitol Hill for either two modifications to the use-it-or-lose-it rule, if the IRS does not act.
“Rollover” would allow the participant to keep unused Flexible Spending Account funds year-to-year without tax penalty, she said. “Cashout” would allow the participant to withdraw unspent funds.
Rankin is hopeful there will be a solution to soften the brutality of the use-it-or-lose it, she said. “It would have a huge impact on participation rates.”
Gabrielle M. Luoma, a tax expert and certified public accountant in Tucson, Ariz., said she has no hope that the IRS will allow cashout without penalty.