If your company currently sponsors a Flexible Spending Account (FSA) or a Health Savings Account (HSA) to allow employees to pay out-of-pocket medical expenses with pre-tax dollars, be prepared for upcoming changes. New health care reform legislation could make these “cafeteria plan” benefits less appealing to employees.
Under the new law, maximum annual FSA contributions are reduced, and there are new regulations affecting how the funds can be used. The intent of the new rules and penalties is to generate revenue which can be used to fund aspects of the health care reform package.
FSAs and HSAs (assuming the employee is covered under a qualified high deductible health plan) allow an employee to contribute tax-free funds that can used to pay for deductibles, drug co-pays, treatments that are not covered by Health insurance, and other qualified medical expenses.
Beginning on January 1, 2013, the annual limit for FSAs will be set at $2,500. Previously, the IRS had stipulated that employers could establish their own FSA contribution limit, and according to the Center on Budget and Policy Priorities, these limits generally fell into the $2,000 to $5,000 range. In 2009, Mercer’s National Survey of Employer-Sponsored Health Plans stated that the average yearly employee contribution was $1,424.
Annual limits for HSAs, however, were not affected by the new legislation.
Be aware that some restrictions will become effective more quickly. For example, as of January 1, 2011, FSA and HSA participants will no longer be able to spend the funds on over-the-counter medications unless a physician has prescribed them specifically. Also starting next year, non-qualified withdrawals from HSAs will be subject to a 20% penalty instead of the 10% penalty which is applied currently.