Get ready for a major change to the way you can use your Flexible Spending Account (FSA). Staring in 2011, you won’t be able to use your FSA to purchase over-the-counter (OTC) medications unless you have a prescription from your doctor. By the year 2013, FSAs will also be capped at $2,500, down from the $5,000 currently allowed under the program. These changes, which are the result of the Affordable Care Act, could have a significant impact on both the revenues of the federal government and your wallet.
The Flexible Spending Account has become an increasingly popular tool for families in budgeting their healthcare costs. FSAs allow employees to set aside pre-tax dollars to use for expenses such as medicines, doctor’s visits, and eyeglasses. About 27 percent of US employers offer FSAs to their employees. Although there are no available data on the number of people currently enrolled, the average amount that employees reserve in FSAs is $1,424. The benefit of the FSA has been long established. Using pre-tax dollars to pay for healthcare expenses saves tax money in the long run, anywhere from 10 to 40 percent depending on income level and tax bracket.
But the rules are changing on January 1, 2011, after which over-the-counter medicines must be paid for out of pocket unless you have a prescription. Under the new rules, to use your FSA to pay for OTC meds such as antacids, allergy medicines, smoking cessation programs, and aspirin, you will have to submit the receipt along with a prescription from your doctor to the FSA. This means more paperwork, and potentially more doctor’s visits and co-pays to get the prescriptions. Many are concerned that this will put even more financial pressure on families that are already struggling to afford healthcare. (Certain types of nonprescription items are not affected by this rule, including crutches, supplies such as bandages, and diagnostic devices such as blood glucose test kits.)
What prompted the change? “I think [federal officials] were just looking for revenue raisers,” says Mike Thompson, a human resource services principal with PricewaterhouseCoopers. Tightening up the tax break on OTC purchases will generate an estimated $5 billion in federal revenues through 2019, according to the Joint Committee on Taxation. That figure represents revenue related not only to FSAs, but also to health savings accounts, health reimbursement arrangements. and Archer medical savings accounts, all of which are affected.