Restrictions on FSAs not a wise move

New Haven, CT - October 27, 2009 - CLAIRE is a Connecticut resident with an insurance plan provided by her employer. I’m withholding her last name to protect her privacy. This year, her husband was diagnosed with stage IV melanoma. They face thousands of dollars of medical expenses not covered by their insurance plan. Fortunately, her employer offers a flexible spending account that enables her to set aside up to $5,000 before taxes from her take-home pay for her family’s health care costs.

The account “helped us to better cope,” she said. “Without our flex account funds, we would more than likely still be paying the 2007 and 2008 medical bills” incurred after a Lyme disease diagnosis and an automobile accident.

For Claire and an estimated 35 million Americans — 430,000 in Connecticut — their money taken from flexible spending accounts is a lifeline, often making the difference between staying afloat and going into debt and sometimes between getting treatment and avoiding it because of the cost.

Why do some in Congress want to help pay for health care reforms by restricting FSAs? The Senate Finance Committee’s health care bill includes a proposal to cap the amount employees can put into FSAs at $2,500 each year, with no provision for raising the cap with inflation.

This is exactly the wrong approach. Income not transferred into FSA accounts is taxed normally, so the cap effectively increases taxes on those who would have added more to the accounts. This runs contrary to President Barack Obama’s pledge not to raise taxes on the middle class as part of health care reform. The average annual income of FSA participants is $55,000.

Not only is the Senate Finance Committee plan unfair, it’s unwise, because FSAs are a valuable tool in lowering health care spending, one of the major goals of health care reform. FSAs, which consist of participants’ money, encourage them to take charge of their health care decisions. The higher the limit, the more people’s money is involved, an incentive to find the lowest-cost options and forgo unnecessary procedures. The pre-tax treatment of FSAs also makes getting the treatment truly needed more affordable.

FSAs are not insurance. Participants voluntarily set aside a portion of their income — on a pretax basis — for out-of-pocket health care costs, ranging from deductibles and copayments to expenses not covered by their insurance plans, such as over-the-counter drugs, eyeglasses and dental care.

Individuals and families with chronic illnesses typically receive the most benefit from FSAs. They incur annual out-of-pocket expenses averaging $4,398 per year, the Robert Wood Johnson Foundation found — well above the limit approved by the Senate Finance Committee and being considered in the House. A surprising number of families — approximately 44 percent of Americans — have one or more chronic conditions.

FSAs are invaluable for diabetics, who through FSAs can pay for testing strips, copays for the specialists they visit on a regular basis and maintenance medications with pretax income. Asthmatics depend on their FSA money to buy nebulizers and inhalers that are critical in preventing attacks. Parents of autistic children, who can face tens of thousands of dollars in annual treatment bills, use FSAs to pay for occupational and speech therapies not covered by their insurance.

As Congress moves forward with health care reform, it should lift the FSA contribution cap and adjust any cap with inflation in order to maintain an FSA’s value over time. It should also fix provisions approved by the Senate Finance Committee and the House Ways and Means Committee that would restrict the use of FSA funds for over-the-counter medications.

Congress should strengthen FSAs by allowing participants to roll over unused FSA funds into the next year — currently, the requirement for money put into FSAs is to “use it or lose it” each year — or have the money remaining in FSA at the end of the year returned to workers and taxed as ordinary income. This will encourage greater participation.

The bottom line: FSAs work and should not be restricted. They are part of the solution. They encourage participants to take an active role in managing their health care and offer a tax savings for many middle-class Americans struggling to afford rising health care costs. If maintained or strengthened, they will enhance the positive impact of health care reform.

John K. Doheny is senior vice president at WageWorks Inc., the nation’s largest independent provider of flexible savings accounts and other pretax benefits.