Health Reformer's Lexicon: Flexible Spending Accounts
The Health Reformer's Lexicon is a weekly feature that will examine key words, terms and phrases in health reform and explore their meaning and orbit.
Today’s term: Flexible spending accounts (FSAs)
Sometimes called flexible spending arrangements, FSAs are employer-established benefit plans that allow employees to pay for qualifying health care expenses with pre-tax earnings.
Employees elect to set aside a portion of their incomes to pay for medical expenses not covered by insurance—such as deductibles, copayments, dental or vision expenses, or drugs. Employees can draw on the accounts using FSA debit cards, known as Flexcards.
FSAs are “use it or lose it” accounts: Any balance left in an employee’s account at the end of a coverage period—typically a calendar year—is forfeited back to the plan administrator.
Why it matters: As the IRS enumerates, FSAs offer several benefits to health care consumers:
• Contributions made by your employer can be excluded from your gross income.
• No employment or federal income taxes are deducted from the contributions.
• Withdrawals may be tax free if you pay qualified medical expenses.
• You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.
But some health care policy analysts have scrutinized FSAs and concluded that they encourage excess utilization of health care, because they can be used to purchase things that may not be medically necessary, cost-effective or provide meaningful health value. Moreover, their “use it or lose it” structure may encourage wasteful spending at the end of coverage periods.
Roots: Flexible spending accounts were first authorized in the Revenue Act of 1978 under section 125 of the federal tax code. For that reason, they are sometimes called “125 plans.” (They are sometimes called “cafeteria plans,” too, because they are a means by which an employer can offer employees a choice between taxable and nontaxable benefits—not just for health care, but also for dependent care or certain other purposes.)
Where the term appears: The recently passed health care reform law limits the amount that employees and companies can contribute to FSAs to $2,500 per year starting in 2013, with annual cost-of-living adjustments in following years. (Unlike FSAs for dependent care, there was previously no federal cap on the amount that could be contributed to FSAs for health care.) Recent news reports have examined the impact of this for consumers, suggesting that people may want to plan costly elective treatments such as braces before the new limit takes effect. Coverage also has delved into the rationale for the policy change—which some portray as a way to reduce wasteful spending and others portray as a way to raise revenue to pay for other aspects of health reform.