Opinion Columnists
Email
Print
Flexible spending accounts, and tax savings in jeopardy
ADVERTISEMENT
Published: September 5, 2009
Much of the recent attention and debate about health-care reform has surrounded insurance coverage and the questions of who will be covered and how that coverage will be provided. Health-reform discussion has placed less emphasis on the equally significant issue of cost.
Regardless of what form the final health-care reform package takes, it is going to be expensive. Recent estimates suggest that it will be as much as $1 trillion over 10 years. How will our country pay for this new health-care package? If a government health-plan option is added, how will that be financed over the coming decades? Congress and the president have pledged to find a way to finance the health-care package so that the cost will not be added to the national debt. However, fulfilling that pledge is already proving to be quite a challenge. To incur such an increase in spending without adding to the national debt, the government will have to also increase its revenues through an increase in tax receipts. One way to accomplish this is through reductions in the tax advantages of plans currently benefiting millions of American workers.
As Congress searches for ways to pay for the proposed health-care legislation (in Congress such revenue-raising methods are known as "pay-fors"), many items are on the table that could have an impact on working Americans, including more than a million North Carolinians. Two specific pay-fors that are not receiving much attention could increase taxes for individuals who are receiving health insurance through their employer and utilizing a Health Flexible Spending Account ("FSA"). FSAs are accounts that enable employees to set aside pre-tax dollars from their paychecks to pay for out-of-pocket medical expenses for themselves and their families. According to industry estimates, approximately 48 million Americans use FSAs, and the average participant saves about 30 percent in taxes because FSA funds are exempt from federal and state income taxes as well as FICA. As an example, an employee earning $40,000 annually who sets aside $3,500 in a Health FSA would save about $1,050 in taxes. Expenses eligible for tax-free FSA reimbursement include deductible expenses, co-pays, prescription drugs, over-the-counter medications, and other treatment-related items. FSAs are especially beneficial for individuals with high monthly medical expenses or with chronic conditions like MS, high blood pressure, or diabetes.
Reports from the Senate Finance Committee's negotiations for a bipartisan bill indicate that they are giving serious consideration to capping contributions employees can make to a Health FSA. Employers currently set the annual maximum, and most employers use a max of $3,000 to $5,000. Indications are that the proposed cap would be in the range of $1,500 to $2,000. Such a cap would result in a certain tax increase for many workers who currently use this benefit to pay for valuable care and reduce health expenses for their families. The financing for health reform must come from somewhere, but it does not make sense to limit a proven means of helping people make smart decisions about their health care and save valuable tax dollars on health expenses.
Additionally, the primary House of Representatives bill (HR 3200) includes the removal of over-the-counter drugs ("OTCs") from the category of reimbursable items through a Health FSA or other tax-favored plan. Use of OTCs on a pre-tax basis is far from the waste and misuse that some assert. Instead, the tax-favored status of OTCs helps encourage individuals to opt for less expensive options instead of more expensive prescriptions that may be covered by their health insurance plans. Removing OTC items may be a quick fix, but it would likely result in a long-term cost increase to health plans and all individuals. This is a practical, unintended consequence of a pay-for that may look good on paper but has deeper impact in the real world.
At a time when the economy is recovering and individuals are looking for ways to pay for health care, a tax increase of any kind on medical expenses is not needed. In any type of health-care reform that might be passed, working Americans will continue to have out-of-pocket expenses. The days of $10 copays and $250 deductibles are gone. While health-care reform is needed in some areas, the current tax advantages of FSAs must be preserved as a critical tool to save for and pay for out-of-pocket medical expenses.
■ Gary Knight is president and owner of ProBenefits, Inc., an employee-benefits administration company in Winston-Salem that assists employers in North Carolina and across the Southeast with health-related benefit plans.
Email
Print
