Mulvey Specialist in Health Care Financing
care Flexible Spending Accounts (FSAs) are benefit plans established by
employers to reimburse employees for health care expenses such as
deductibles and copayments. FSAs are usually funded by employees through
salary reduction agreements, although employers are permitted to
contribute as well. The contributions to and withdrawals from FSAs are
tax-exempt. Historically, health care FSA contributions were forfeited if
not used by the end of the year. However, in 2005, the Internal Revenue
Service (IRS) formally determined that employers may extend the deadline
for using unspent balances up to 2½ months after the end of the plan year (i.e, until
March 15 for most plans). The Tax Relief and Health Care Act of 2006 (P.L.
109-432) allows individuals to make limited, one-time rollovers from
balances in their health care FSAs to Health Savings Accounts (HSAs).
According to the Bureau of Labor Statistics National Compensation Survey, 39%
of all workers in 2010 had access to a health care flexible spending
account. When viewed by firm size, 56% of workers in firms with more than
100 workers had access to a health care FSA. The accounts were not as common
for workers in small businesses. In establishments with fewer than 100 employees,
20% of the workers could choose to participate in an FSA. Not all employees
offered an FSA chose to participate. According to a 2010 Mercer Survey,
37% of employees offered an FSA chose to participate and the average
annual contribution was $1,420. In 2003, FSAs became available to federal
employees for the first time. In September 2008, about 240,000 federal employees
had health care FSAs.
These other points might be noted about health care FSAs:
• FSAs are limited to employees and former employees.
• The IRS imposes no dollar limit on health care FSA contributions, but
employers generally do.
• FSAs generally can be used only for unreimbursed medical expenses that would be
deductible under the Internal Revenue Code, but not for health insurance or long-term
care insurance premiums.
• Employers may impose additional restrictions.
On March 23, President Obama signed health care reform legislation into law—the
Patient Protection and Affordable Care Act (ACA; P.L. 111-148), some
provisions of which are amended by the Health Care and Education
Reconciliation Act of 2010 (P.L. 111-152). ACA modified the definition of
qualified medical expenses to exclude over-the-counter prescriptions (not
prescribed by a physician) as a qualified expense effective 2011. In
addition, ACA limits the annual FSA contributions to $2,500 beginning in
Two bills in the House affecting health FSAs were ordered reported by the
Committee on Ways and Means on May 31, 2012: H.R. 5842, Restoring Access
to Medication Act of 2012, and H.R. 1004, Health Flexible Spending
Arrangements Act of 2012. Similar bills in the Senate have been referred
to the Senate Finance Committee (S. 1368 and S. 1404). This report discusses
these bills in greater detail.
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