Under the landmark health care reform law enacted in March 2010, over the counter (OTC) drugs will no longer be eligible flexible spending account (FSA) expenses in 2011 unless employees have a prescription. In addition, individuals will not be able to contribute more than $2,500 to an FSA starting in 2013.
Employers will be required to amend plan documents and communicate these changes to employees. And the new limits may lead more employees to consider coupling FSAs with health savings accounts (HSAs), if offered, in order to increase the total amount of pre-tax dollars that they can put aside for uncovered health-related expenses.
Employees that have an HSA cannot also contribute to a medical FSA but can contribute (using pre-tax dollars) to a limited purpose FSA for dental or vision services.
While the new FSA provisions won’t significantly impact most employees, as of 2013 "it will be more expensive for those needing maintenance care related to chronic conditions, and for those needing dental or vision care not covered by the medical plan," if those expenses exceed $2,500 annually, explained Sara Taylor, health and welfare strategy leader at consultancy Hewitt Associates.
'It will be more expensive for those needing
maintenance care related to chronic conditions.'
Regarding communications about FSA contribution limits, "there may be some confusion among employees since, for years, employers have promoted the use of FSAs for over-the-counter drugs. Now, employees will need a doctor's prescription for reimbursement," Taylor pointed out.
When to Amend
Indications are that most employers will wait until 2013 to amend their FSA plans, "but there's no reason why an employer has to wait to implement the reduced rates," Taylor said.
Prior to reform, there had been no statutory limit on individual FSA contributions, although plans have been free to impose their own limit. "Most large employers have allowed employees to contribute up to $5,000 or more to their FSAs," Taylor said. "So there's a fair number that are going to have to make a change to their plans. When they do make that change, I think almost all employers will cap their contribution limits up to the $2,500 maximum and then index that limit to inflation as the statute allows. I don't think it's likely that you'll see many employers impose limits below the $2,500 ceiling."
Combining FSAs and HSAs
"We may see additional movement toward health savings accounts (HSAs)" in the wake of the limit on FSA contributions, Taylor predicted. For 2010, for example, contribution limits for HSAs were $3,050 for individuals with annual increases tied to the inflation rate. It's not permissible to offer employers a traditional health care FSA and an HSA linked to a high-deductible health plan. But employers may offer employees an HSA and an FSA that is limited to vision and/or dental services, and this option will remain available despite health care reform.
Excluding the possibility of deflation, in 2013 using both an HSA and a dental/vision FSA would allow an employee to contribute over $5,550 in pretax dollars for allowable health-related expenses. However, contributions to FSAs will still be subject to an annual "use it or lose it" rule, while HSA contributions are employee-owned and, if unspent, continue growing from year to year.
"As health care reform plays out, one argument is that employers seeking to hold down their plan costs will introduce a high-deduction health plan if they haven't already done so," Taylor said.
The reform law requires that small-group plan deductibles be capped, but at a still relatively high $2,000 for individuals and $4,000 for families, with an exception allowing higher deductible policies for people under age 30. If employers do introduce a high-deductible plan, Taylor said, then "providing access to an HSA funded with pretax dollars can help ease the transition.”
However, employers should be mindful that offering an HSA and a limited FSA together can be confusing for employees. "When employers offer both a health savings account and a flexible spending account, we get a lot more questions from employees trying to understand what the differences are between these multiple accounts that they now need to navigate," Taylor said.
An April 2010 analysis by consultancy Hewitt Associates drew on the firm's database of more than 220 U.S. employers covering more than 6 million employees. Among the findings:
Few employees currently contribute to FSA accounts:
• Only 20 percent of U.S. employees contributed to an FSA in 2010, either because they were not offered by their employer, or in large part because of concerns over the "use it or lose it" rule requiring them to forfeit unspent contributions each year.
• Employees who participate typically save between $250 and $640 each year in federal taxes.
• Three-quarters of FSA expenses are for prescription drugs and medical treatments.
Most employees contribute significantly less than the upcoming $2,500 maximum limit:
• Of those employees who contribute to an FSA, the average annual contribution is $1,441.
• 18 percent of workers contributed more than $2,500 and tended to be individuals earning more than $150,000 a year.
OTC drugs make up a small portion of overall FSA spending:
• Around 7 percent of all FSA claims in 2009 were for OTC drugs.
Stephen Miller is an online editor/manager for SHRM.
Related SHRM Article:
Reform Creates Opportunities, Uncertainties for Consumer-Directed Plans, SHRM Online Benefitsscipline, March 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page