Health expense accounts could face cuts

The health care bill proposed last week by the Senate Finance Committee would pare tax-free health expense accounts.

That's troublesome to workers such as Frank Mallak, who takes advantage of the flexible spending account (FSA) offered by his company. Every year for 11 years, Mallak, who lives with his wife, Jan, in Pittsburgh, has made the maximum contribution of pretax dollars to his FSA. He uses the funds to pay for his asthma, diabetes and arthritis prescription drugs, as well as chiropractor bills.

The legislation would limit FSA contributions to $2,000 a year beginning in 2013. And it would standardize the expenses that are qualified.

"The Finance Committee presumably decided that the revenue loss from FSAs is large in relation to the good it does," says Paul Ginsburg, president of the Center for Studying Health System Change.

"The Finance Committee needs to keep the cost of the health reform down, and the FSA seems less valuable than money that goes to expand the number of people who get health insurance coverage," he says.

Mallak's employer allows him to set aside $3,600 in the FSA a year, and even that is not enough, he says. "It's an important issue to me," Mallak says. "Usually in the fourth quarter, I've depleted all of my money."

Hard to predict expenses

Some health plan administrators are distressed that Congress may scale back such accounts. Administrators have started a campaign to preserve the flexibility in the plans.

Currently, employers can set the yearly contribution limit. Federal employees, for example, have a cap of $5,000, says Joe Jackson, CEO of WageWorks, which runs nationwide FSA programs.

Capping it at $2,000 would reduce the value of the benefit, hurting those who battle chronic conditions, he says.

Although many employers offer flex accounts, not all employees take advantage of them. About 20% of workers offered an FSA take advantage of it, says Paul Fronstin, director of the health research and education program at the Employee Benefits Research Institute, a non-partisan group in Washington.

During plan enrollment, FSA participants must decide how much to set aside in pretax money from their paychecks. They can get reimbursed for co-payments and deductibles, dental care, eyeglasses and certain other expenses.

If employees don't use all the funds during the year, they lose them. The remaining money goes back to the company.

"It's ridiculous the way that it's set up now," says Allen Pendergrass, an engineer in Decatur, Ala. "You can't predict a lot of the routine expenses. It's like they don't want people to be able to take advantage of it."

Pendergrass, who is married and has three children, has been able to predict health expenses several of the past 11 years. But this summer he had a root canal and two crowns.

An FSA would have been helpful, but he had not expected the expenses.

The most recent estimate of the average contribution to an FSA is about $1,400, Fronstin says. "So the average person wouldn't be affected by the $2,000 limit."

Benefits high-income workers

Some industry experts say Congress needs to re-evaluate FSAs to determine whether they have any place in health insurance.

"It's a very regressive tax policy," Ginsburg says. "Call it a broadly available tax loophole that is hard to defend."

Among problems, he says, is that at the end of the year, some FSA participants rush to buy items such as designer prescription sunglasses because if they don't spend the money by year's end, they will lose it. And high-income workers benefit more from FSAs because they get a greater tax savings than someone in a lower tax bracket, says Jeff Munn, principal of Hewitt's Health Management Practice.

Other options exist for those who have chronic health conditions. They can itemize their taxes and include unreimbursed medical expenses that exceed 7.5% of their adjustable gross income.

A different option, the health savings account (HSA), allows the pretax money to be rolled over from year to year. The disadvantage is that a worker must enroll in a high-deductible plan. This year, the minimum deductible is $1,150; for a family, it's $2,300.

About 30% to 40% of large employers offer an HSA, Munn says. Sometimes the employer puts seed money into the account for workers to make it attractive.

Still, few people take advantage of them. Last year, about 7.9% of the adult population with health insurance had an HSA or the somewhat-similar reimbursement account, according to Hewitt.

The idea behind an HSA is to make consumers think twice before they visit a doctor or run up other health care expenses. It also lets someone save money for a rainy day.

If an employee changes jobs, the money in an HSA moves, too. The money can be withdrawn and used for non-health related expenses. If taken out before age 65, the account holder will pay income tax plus a 10% penalty.

The Senate Finance Committee bill would increase the penalty to 20%, beginning in 2010.

Flex accounts at a glance

A look at flexible spending accounts offered by some employers: