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Flexible spending accounts

Chris Farrell Jul 20, 2010

Question: Apparently there’s a section in the new health-care reform law that phases out the use of flexible spending accounts. I’ve heard many policy analysts say that FSAs or HSAs are the future of health care, giving people direct control over costs and encouraging them to take responsibility for their own health-care spending. So I don’t understand why the new law downplays FSAs. Is there some special-interest group that would benefit if FSAs were eliminated? Debbie, Cleveland, GA

Answer: A flexible spending account is an employer-sponsored benefit. It allows you to pay for qualified medical expenses with pre-tax dollars.

The pre-tax benefit saves you money but you do need to calculate accurately how much you will spend every year since what you don’t use, you lose. The employer sets the limit on how much their workers can set aside in an FSA with a typical limit of $5,000.

The new health care law doesn’t eliminate the employer benefit. It limits the annual maximum that can be put into an FSA account to $2,500 starting in 2013. For most employees the change doesn’t matter since they don’t put that much aside every year anyway. For instance, according to the Employee Benefits Research Institute the average FSA account was $1,235 in 2005. Another change: You’ll no longer be able to use the account to pay for over-the-counter medicines that aren’t prescribed by your doctor.

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