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Flexible Spending Accounts (FSAs)

Why Employers Care

Health Flexible Spending Accounts (FSAs) encourage consumerism by promoting greater individual control over and responsibility for employees' health care spending decisions. By allowing employees to save on a pre-tax basis for out-of-pocket health expenses, these accounts provide an opportunity to save money for health care expenses while also developing an appreciation for the cost of services and the importance of planning ahead.

As with any tax-advantaged vehicle, health FSAs are subject to strict IRS rules governing their design and administration. Employers must currently comply with a host of complicated and sometimes restrictive regulations on reimbursable medical expenses, the use of debit cards to pay for eligible medical expenses, coordination with other types of health care accounts (HRAs and HSAs) and carrying over unused amounts to future years (the "use-it-or-lose it" rule).

Rep. Ron Kind (D-WI) and Kevin Brady (R-TX) re-introduced a bill that would allow people to use their health accounts to pay for fitness center fees, to buy equipment or pay for physical exercise programs.

Recently, the IRS issued guidance permitting plan sponsors to modify the "use-or-lose" rule for health FSAs to allow a $500 carryover of unused health FSA funds into the following plan year, provided the health FSA does not also have a 2½ month grace period for incurring and submitting claims the following plan year. The Business Group believes that the IRS should remove the arbitrary time limit and increase the amount of funds for rollover.

The Patient Protection and Affordable Care Act includes provisions that place a $2500 cap on people's FSA contributions in 2013. In addition, beginning January 1st, 2011 people may only use health flexible spending accounts (FSAs), health savings accounts (HSAs), or health reimbursement arrangements (HRAs) to pay for OTC medicines like those in the following categories if they have prescriptions for them:

Allergy Medicines
Antibiotic Ointments
Anti-Itch Medicines
Anti-Inflammatory Drugs
Anti-Fungal Treatments
Cold Remedies
Cough Medicines
Digestive Aids
Heartburn Medicines
Pain Relievers
Respiratory Treatments
Sinus Medications
Sleeping Aids
Stomach Remedies

People can still submit claims for reimbursement for these OTC products with appropriate documentation (copy of the prescription and the receipts). Since the law passed, Congress has multiple times considered legislation that would repeal the provision in the Affordable Care Act which bans people from using health accounts to purchase OTC products. Unfortunately, Congress has so far failed to remove this onerous requirement. The Business Group sent support letters in favor of the legislation.

What Can Employers Do?

In order to realize health FSAs' full potential as health care funding vehicles, changes to expand their flexibility and increase their usability must be made.

As members of the National Business Group on Health, employers can voice their concerns while shaping and influencing public policy on health FSA regulations and legislation to the Business Group's public policy team and by responding to public policy opportunities to comment on proposed regulations, contact Congress and/or the Administration, testify, or participate in related activities.

In offering FSAs, employers will also need to communicate the value of these accounts on a regular basis. Although FSAs are becoming more widely used, employees may harbor misconceptions or confuse them with other types of health accounts.

Relevant Tools and Resources Include:

Page last updated: September 29, 2014

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