Your Health Flexible Spending Account just got a little less flexible

Guest blogger, J. Nicole Martin, J.D., is an associate attorney at the law firm of Stevens & Lee, P.C.  She focuses her practice on health care law.

Each new year ushers in changes, and recently these have included changes related to health reform. Beginning in 2013, under the Affordable Care Act (ACA) your Flexible Spending Account (FSA) will be limited to a maximum contribution of $2,500 per health plan year.

What does this mean? Those who are eligible through their employer to have an FSA will be limited to contributing up to $2,500, which is not subject to federal income or payroll taxes, for qualified medical expenses. The amount set aside may be spent on items such as medications, medical equipment, co-pays, glasses and contact lenses, and dental devices.

Why did the ACA institute a maximum amount for FSAs when prior to 2013 limits were set by employers? 

The limitation was one of a number of “revenue offset provisions” included in the ACA to generate funding for other changes. By limiting the maximum amount of money individuals may contribute on a “pre-tax” basis to an FSA, the federal government will be able to generate additional tax revenue that can be used to fund health reform. Additional sources of anticipated revenue include an annual assessment on health insurers, excise taxes on the sale of medical devices, an annual fee charged to prescription drug manufacturers and importers, and excise taxes on certain high cost insurance plans.

Will the amount generated by the new FSA limit really make much of a difference? Perhaps not.

A Congressional Research Service Report to Congress in 2012 cited a 2010 Mercer Survey, which found that only 37% of employees who were offered an FSA option participated, and on average they only elected to set aside $1,420, which is significantly lower than the new $2,500 limit. This finding suggests that for the average employee this change will not have a notable impact. However, employees who have significant health problems and use FSAs to cover associated medical costs could find that the effect of the change is substantial.

As part of health reform, the federal government needed to incorporate mechanisms to generate revenue to fund the expansion of health insurance coverage. While many of the changes such as this one may not generate a substantial amount of revenue on their own, taken together, they could add up to a substantial sum.

The actual amount of revenue that is generated by the ACA’s changes to FSAs will be determined by budget analysts. However, it may be more important to assess whether the benefits of the FSA change outweigh the cost that will be borne by those employees with substantial medical expenses who had relied on the larger FSA contribution limits.