The Lowdown on FSA Spending Limits
New caps on employee contributions to flexible-spending accounts should affect certain employees more than others, experts say.
By Lin Grensing-Pophal
In approximately one month, employers -- and their employees -- will see a change in flexible-spending accounts. A provision of the Patient Protection and Affordable Care Act will result in a mandatory contribution limit of $2,500 per year, down from $5,000 the year before, resulting in an increased tax burden for those who use these accounts. This change is on the heels of a modification in 2012 that took over-the-counter drugs off the list of approved expenditures.
Alexander Domaszewicz, a principal and senior consultant with Mercer, based in Newport Beach, Calif., says he thinks the change is one of the least-welcomed features of healthcare reform.
"As healthcare affordability is getting tougher," he says, "why is the government taking away the tools for folks to create an affordable healthcare equation for their workforce and for individual employees?"
Taxes are certainly part of the answer to that question. The government has estimated that tax collections will be increased by $600 million in 2013 through this change. This number, however, pales in comparison to the overall $80.7 billion the government expects to take in after the Patient Protection and Affordable Care Act is fully implemented in the coming years, Domaszewicz says.
What is the potential impact of this change on employees' decisions to enroll in these plans and, subsequently, on employers' decisions to offer them in the first place?
Currently, according to a recent Benefits USA survey, 90 percent of companies offer a flexible-spending accounts to employees, with 24 percent of employees enrolling in the plans. Depending on their individual income-tax bracket, employees save a combined 18 percent to 50 percent on federal, state and local income and wage taxes on medical expenses funded through an FSA.
FSAs, says Domaszewicz, are "a nice, advantageous tool to offer the workforce." They line up, he says, with other trends in the marketplace as employees are being asked to take on more direct expenses related to their healthcare costs, and employers can help mitigate those costs by providing tools like FSAs.
"It also lines up with other movements we see out there," says Domaszewicz, such as consumer-directed healthcare, health-savings accounts and health-reimbursement arrangements. "We see employers that are interested in moving in this direction are sometimes using flexible spending accounts as training wheels to get people comfortable with a tax-advantaged account that's earmarked for healthcare."
Until the new mandated-contribution limit takes effect on Jan. 1, 2013, employers have had the ability to establish their own contribution limits. On average, says Domaszewicz, based on Mercer's 2011 research, large employers established limits at $5,000, while smaller employers -- those with less than 500 employees -- were at a median of about $3,000. So, he says, for smaller organizations this may not create much of a change, especially because only about one in four of those companies currently offer these plans (compared to about 60 percent of larger organizations).
In addition, a 2010 Mercer survey indicated that the annual average employee contribution to these accounts was $1,420.
Domaszewicz says he doesn't see the change having a major impact for employers -- or their employees. "Most employers are going to still continue to offer FSAs as a tool if they already offer them."
Steve Wojcik, vice president, public policy, at the National Business Group on Health in Washington, D.C., agrees. "For many employees there will be no impact because it will only affect them if their employers allow them to deduct or elect more than $2,500." And, he adds, "there's a low take-up rate -- lots of employers offer FSAs, few employees use them and probably even fewer use more than $2,500 if their employer permits that. I don't think this affects too many employers or too many employees."
There are certain employees who may be more impacted than others, though. Those planning a family or anticipating orthodontia needs for their children, for example, are among those who might want the opportunity to contribute more than $2,500.
Amy Kaminski, vice president of Compdata Surveys in Olathe, Kan. -- which conducts the Benefits USA research -- says that, while there may be some employers that choose to combat potential additional employee costs created by this change by creating or expanding their current benefit or wellness programs, others may not be too concerned.
"Some employers may not be too concerned with adjusting their current benefit programs, as they are trying to cut costs themselves," she says.
In addition, she says most employers typically make adjustments to counteract a change they have control over, such as higher medical-insurance premiums, which contribute to employee satisfaction. However, because FSA-contribution limits are a federal requirement, employers don't have any control over this change to their benefit plan.
And because the change will occur across all industries and affect all employers, she says, it is not likely employers will experience higher turnover as a result of the change.
"With regards to provisions of the Affordable Care Act slated to go into effect in 2013, particularly those surrounding flexible-spending accounts, HR's function is two-fold," she says. "Ensure timely implementation of regulated changes within their organization; and disseminate information to employees on how these changes will affect them and their current healthcare plan."
Domaszewicz also points out that, unless employers stop offering the plans entirely -- which they are unlikely to do – it's the government and not employers that are the "bad guys" in this situation.
Wojick notes that the bigger problem for employers is "getting people to see the advantage of the flexible-spending account and making sure they maximize the benefits by using it to the full extent they can. That's always been the problem."
Despite the change, Domaszewicz points out: "I think it's going to continue to be a valued tool regardless of the limitations, as $2,500 is still a meaningful amount."