MINNEAPOLIS - It is "heads up" time for thousands of Minnesota wage earners. Changes are coming for those who participate in Health Care Flexible Spending Accounts (FSA's)through their employers.
"Over 70% of large employers offer Flexible Spending Accounts," according to Lucinda Jesson, Director of the Health Law Institute at Hamline University in Saint Paul. "It is about 20-25% of small employers offer these accounts."
How FSA's work
"Employees can allocate a certain amount of money at the beginning of the year to pay for qualified medical expenses," explained Jean Marie Abraham, Ph.D., Assistant Professor in the Division of Policy and Management at the University of Minnesota, School of Public Health in Minneapolis. "As part of the 'Patient Protection and Affordable Care Act', there are going to be two major changes to Flexible Spending Accounts."
FSA's were created by Federal law in the late 1970's to help workers at companies with health insurance benefits pay for non-covered medical expenses. Each year, the individual employee who opts into an FSA program, designates how much pre-tax money is to be allocated to a special account from each paycheck.
"Flexible Spending Accounts are to pay for those things that those of us who have health insurance, the health insurance does not cover everything," said Jesson. (the FSA is for) "expenses like braces that are medical expenses that are not reimbursed by your health plan."
Employers set limits
While the law sets no limit on the amount that can be allocated, corporations almost always do set limits, usually $5,000 or less. The participating employee can be reimbursed for items such as health insurance deductibles and co-pays, dental expenses, and over-the-counter medications, up to the limit of their annual allocation.
The employee can submit claims and receive reimbursement for expenses, even if the amount deducted from his/her paycheck has not yet reached the amount of the claim. For instance, an employee elects to have $3,000 as their Health Care FSA for a given year. In January of that year, he/she incurs non-covered expenses totaling $3,000, even though the contribution to the FSA will not reach that figure until December.
"Employers are concerned about the potential liability to them," explained Abraham. "Right now, an individual will make an allocation during an 'open' enrollment period and then that money is taken out paycheck-by-paycheck. But an employee who incurs a large medical expense may submit for reimbursement at the beginning of the year, for example, and receive that reimbursement. If that employee happens to leave the company (before the end of that year), the company may be on the hook for that cost."
Use it or lose it
However, for the employee, it is a "use it or lose it" benefit. if the employee fails to use the entire allocation before the end of the year, he/she loses the balance. It stays with the company. "They (the employees) are taking the hit and, yet, if that money stays with the employer and the employer's benefit plan, then the employer is gaining and the government is subsidizing that through our tax system," observed Jesson.
For the "use it or lose it" reason, many FSA participants scramble to use their remaining account balances at the end of the year for items such as an extra pair of eye glasses or by stocking up on over-the-counter medications. That is an area of the plan that figures heavily into the new changes.
Uncle Sam's concerns
"The government, I think, was concerned that people, at the end of the year, were using up their health care spending accounts on things that were not medically necessary. Because they (the funds) are not taxed, the government is then subsidizing the purchase of something that is not necessary," said Jesson.
Jesson said the new federal Affordable Health Care Act will make a major change in such purchases. "Starting next January, purchase of over-the-counter (OTC) medications is not going to be automatically reimbursed. You cannot pay for that tax-free out of an FSA (in 2011). What you can do, though, is pay for that (and be reimbursed) if it is prescribed by your physician."
In fact, the new health care reform law specifies which OTC medications can be reimbursed only with a doctor's orders and which do not require one. For example: aspirin, anti-itch crèmes, hemorrhoid preparations and cough medicines will require the note. Bandages, contact lens supplies, denture adhesives and reading glasses will not require a doctor's approval for FSA reimbursement. Insulin will be reimbursable without a physician's note.
New Limits coming in 2013
The other major change involving FSA's is a limit on allowable allocations by an individual. Although there is no limit in the original FSA law, there will be one beginning in 2013. The limit will be $2500 annually, possibly less than current limits by participating employers. The new allocation limit coupled with the OTC restrictions are aimed at helping the government's bottom line.
Paying for Health Care reform
"The Federal Health Reform effort that just passed is going to cost almost a trillion dollars and we need to pay for that," commented Jesson. "About half of that came from savings within the system, but the rest of it is coming from taxes."
Abraham agreed. "One of the motivations for changing the law around FSA's is with respect to revenue generation. To pay for the Patient Protection and Affordability Care Act, Congress needed to come up with several ways to raise revenue...The two provisions (OTC medications and $2500 cap) are estimated to raise $18 billion over the next 10 years, money that can be used to pay for Federal reform."
Advice for FSA users
Jesson and Abraham have advice for employees who use FSA's.
"If they expect to incur more than $2500 in medical expenses that are not covered by insurance, then they should think carefully about the timing of pursuing that care (sooner rather than later)," said Abraham. "I think it is really important that individuals who take advantage of the FSA's really need to sit down and think through what types of medical expenses, they had sought reimbursement for in the previous year."
"I think there are two things people should be concerned about," observed Jesson. "If they are in a high deductible health plan, where their deductibles and co-pays, across the course of a year, may end up being $3-4,000, they need to start planning ahead. Maybe rather than being in a traditional health insurance plan that their employer offers, with an FSA, they should look at some of the high deductible heath plans with an HSA, which is a Health Care Savings Account. The money that is left over at the end of a year can roll over to the next year.
"So, I think people should be re-evaluating the choices that they are making going forward. Also, they should think about what they are spending that money (FSA) for because that is going to change starting next January."
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