New rules bring major changes to health FSAs

September 21, 2012

While the 2010 health care reform law featured a handful of historic AOA-backed provisions, the sweeping measure also contained considerable changes to how many Americans may contribute to and use health flexible spending arrangements (health FSAs) and other health spending accounts.

To help generate revenue for the Affordable Care Act’s (ACA) health insurance tax credits other spending, Congress placed new caps on the dollar amount employees may contribute to their health FSA, created stricter rules about how that money may be spent, and doubled the penalty for using the tax-free money for non-qualified expenses.

Health FSAs and other similar arrangements allow employees to set-aside pre-tax dollars that may later be used to pay for a wide range of health care-related expenses, such drug co-pays, deductibles, eyeglasses, contact lenses, and treatments not covered by insurance.

Unlike other health spending accounts, though, health FSAs are designed as “use-it-or-lose-it” accounts. While account holders may take advantage of a 10-week grace period, any unused balance from the previous year generally may not be used to fund health care spending within the next plan year.

Beginning in 2011, patients are banned from using tax-advantaged money, either from a health FSA or a health savings account, to pay for over-the-counter medications and supplies that aren’t specifically prescribed to them. The law also doubled the penalty for using the tax-free money for non-qualified expenses before the age of 65 – from 10 percent to 20 percent.

In one of the more contentious FSA changes, the ACA places an annual limit, starting in 2013, on individual contributions at $2,500. Previously, the Internal Revenue Service (IRS) allowed employers to establish their own FSA contribution limit, and according to the Center for Budget and Policy Priorities, these limits generally fell within the $2,000 to $5,000 range. A 2009 study found that the average yearly employee contribution was roughly $1,400.

The new FSA caps and other restrictions, though, are an ongoing source of debate in Congress. Earlier this year, a measure that would have removed the new caps and other constraints passed in the U.S. House largely along party lines, with a few vulnerable Democrats joining with the Republican majority. However, with Democrats firmly in control of the U.S. Senate, little hope exists that such an effort will reach the upper chamber’s floor for a vote this year.

Of particular concern to optometry, the IRS recently proposed to do away with the “use-or-lose rule” as it relates to health FSAs. Originally created to ensure that employees did not simply treat health FSAs as a tax-free savings account, the “use-or-lose rule” has played an important role in providing an incentive for more Americans to seek primary eye and vision care as well systemic preventive care through a visit to their local doctor of optometry.

Arguing that the annual ritual of reminding employees that they must deplete their FSA or lose those funds was a burden for businesses, IRS policymakers claim that the rule could be abolished as the new $2,500 contribution cap means that this type of disincentive is no longer necessary. Challenging that IRS reasoning, the AOA has made clear that the change would provide a new and substantial incentive to delay or elude care, which could ultimately result in poorer health outcomes for individual patients and overall higher costs for public and private payers.

In Aug. 17 comments delivered to the IRS, the AOA stressed that modification or total elimination of the rule would all but encourage employees to hold on to their contributions and avoid key primary and preventive care opportunities.

In cautioning the IRS, the AOA held that “we are particularly concerned that employees will see a new and sizable financial incentive to delay cost-saving preventive care, such as comprehensive eye exams, or forgo other needed care altogether.”

“While asymptomatic comprehensive eye exams are important due to the fact that many eye and vision problems have no obvious sign or symptom, periodic comprehensive eye examinations provided by an optometrist or ophthalmologist also play a leading role in detecting undiagnosed systemic diseases, such as diabetes or hypertension,” the letter said.
“Elimination of the ‘use-or-lose’ rule will undoubtedly lead to less primary and preventive eye and vision care and, in turn, higher costs for employers and employees due to missed opportunities for early diagnosis and treatment of a range of conditions, including diabetes and hypertension – the two diseases that are now having the most significant impact on the health of the American public and the bottom line for our nation’s businesses.”

While the IRS has yet to respond, the AOA will continue to monitor developments and actively engage as the agency seeks to implement changes to health spending accounts.

For more information on this topic or to learn how you can become more involved in federal advocacy, contact the AOA Washington office team at 800-365-2219 or ImpactWashingtonDC@aoa.org.

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