Changing rules on flexible spending accounts mean that starting next year, you can use money from an FSA account to pay for eyeglasses or acupuncture but not an aspirin -- that is, unless you have a prescription for it.
FSA's typically work like this: Your employer regularly takes pre-tax money out of your paycheck and you can use it during the year to pay for qualified medical expenses. The only catch is, if you don't use it, you lose it. Employers set how much employees may contribute each year -- typically up to $5,000 depending on the size of the business.
Edwin Park, a senior fellow at the Center on Budget and Policy Priorities, says FSAs encourage people to overuse the health care system since they can't roll over any unused balance from the previous year. They're often left scrambling at year's end to buy things they don't need or to see the doctor when they don't need to, he explained.
"It's encouraging a whole host of services whether they were medically needed or not," he said.
Now, lawmakers have changed the way flexible spending accounts are treated in order -- they say -- to discourage wasteful health care spending at the end of the year. The government will now cap annual contributions to FSAs at $2,500 and consumers will no longer be able to use the accounts to purchase over-the-counter medications such as allergy medicine or aspirin without a doctor's prescription.
According to Park, the new health law is designed to subsidize the cost of insurance and set standards of coverage to limit the out-of-pocket costs to people, which were the reason the FSAs were envisioned in the first place -- to help people pay for medical expenses with tax-free dollars. That protection is less likely to be needed as people receive help from the government in other ways to pay their medical bills, he said.
But others argue that the change will not drive down health system costs. "It's a revenue raiser. There's nothing sophisticated about it at all," said Joe Antos, a health economist with the American Enterprise Institute.
The change will raise revenue for the government by reducing the amount of money people can set aside pre-tax -- meaning that they pay taxes on more of their salary.
The Joint Committee on Taxation estimated that the change would increase government revenue to help offset the costs of the health reform law by $18 billion over 10 years -- a fraction of the $409 billion in federal revenues that the entire overhaul is expected to generate.
Tonya Pierce, of Greenville, S.C., said the cap on FSA contributions will hurt her family. Under her husband's health insurance plan, the family agrees to put aside $5,000 each year in an FSA. The whole amount of that money is available to them starting in January for medical expenses, and the family then in essence pays back the employer by having money taken out of each paycheck. Indeed, she likened having an FSA to having an annual, tax-free, interest-free loan for medical expenses.
The family uses the FSA money to pay for their daughter's over-the-counter allergy and asthma medicines as well as their own prescription and health care costs not covered by their high-deductible insurance plan benefits -- which run substantially higher than the $5,000 the family puts away each year. "We put the absolute maximum we can each year and we use it," she says. In addition, Pierce said, the $2,500 cap on FSAs will put the family in a higher tax bracket.