Political leaders press for changes in FSAs and HSAs

Some political leaders are making noise about making improvements to flexible spending accounts (FSAs) and health savings accounts (HSAs) — two health insurance benefits that are used by millions of Americans.

In a memo dated Feb. 14, 2011, Dick Armey — former U.S. House majority leader and a Tea Party organizer — and two FreedomWorks colleagues urged Republican leaders in the U.S. House to bump up the contribution limits for HSAs to $8,000 for an individual or $16,000 for a family. For 2011, the HSA contribution limits are $3,050 for an individual and $6,150 for a family.

Meanwhile, two members of Congress have filed legislation that would reverse key FSA and HSA changes included in the federal health care reform law — namely a halt to over-the-counter medication purchases with FSA and HSA money.

Tea Party activist Dick Armey proposes that Americans be able to contribute significantly more to their health savings accounts (HSAs).

The Armey memo also calls for letting employers take a tax deduction for contributions made to an employee’s HSA, and allowing people to keep their HSAs after turning 65 years old and to roll their IRA or 401(k) funds into an HSA during retirement.

Currently, about 10 million Americans have HSAs and about 35 millions have FSAs.

As it stands now, money in an HSA can carry over from one year to the next. Money in an FSA is lost if it’s not spent before the end of the year. HSAs even can be used in retirement planning, with funds growing tax-free. After age 65, HSA withdrawals can be spent on anything, although non-medical expenses are taxed.

You can enroll in an HSA only if you are covered by a high-deductible health insurance policy — at least $1,200 for an individual or $2,400 for a family. HSAs provide a way for people to budget for out-of-pocket health care expenses while saving on premiums through a high deductible. FSAs, on the other hand, impose no requirements related to existing health care coverage.

On another front, U.S. Sen. Kay Bailey Hutchison, R-Texas, and U.S. Rep. Erik Paulsen, R-Minn., have introduced companion bills that would repeal FSA and HSA changes that are tucked into the federal health care reform law. The Hutchison-Paulsen measure is known as the Patients’ Freedom to Choose Act of 2011.

As of 2011, money in FSAs and HSAs no longer can be used to buy over-the-counter medications without first obtaining a prescription. With FSAs, this change is a particular concern. Because of the FSA spend-it-or-lose-it provision, people often have put money left at the end of the year toward stocking up on staples like cold medicine. In 2013, a further change to FSAs comes in the form of a $2,500 cap on annual contributions; employers currently establish the contribution limit.

U.S. Sen. Kay Bailey Hutchison is pushing for changes in federal law regarding flexible spending accounts (FSAs) and health savings accounts (HSAs), such as removal of a new prohibition on spending money in those accounts for over-the-counter drugs.

The Foundation for HealthSMART Consumers estimates the spending restriction for over-the-counter medications will trigger nearly $700 million in extra health care costs each year.

Paulsen says: “Instead of limiting options, as is happening under the new health care law, we should be empowering patients by giving them increased access to affordable, quality care.”

The legislation would restore a patient’s ability to use FSAs and HSAs for over-the-counter drug purchases and remove the contribution cap on FSAs.

“Under the health law, the federal government is stifling patients’ flexibility and freedom to use health benefit accounts that have helped make care more affordable for tens of millions Americans,” says Hutchison, the Texas senator. “Our bill strikes these arbitrary limitations and puts patients back in charge of how and when they’ll use HSA and FSA benefits.”

Among supporters of the Hutchison-Paulsen legislation are the Consumer Healthcare Products Association and National Association of Chain Drug Stores.

From the perspective of health care reform advocates, the logic behind the FSA and HSA changes is that once every American is mandated to carry health insurance, less of a need will exist for payment of out-of-pocket health care costs. So, those advocates say, the federal tax revenue that has been lost on FSAs and HSAs could again be collected and applied toward various health care reforms.

“Over-the-counter therapies are a cost-effective and efficient way for Americans to stay healthy,” says Joe Jackson, chairman of a grassroots campaign called Save Flexible Spending Plans. “It’s simply ridiculous that Congress would force consumers to spend additional time and money to obtain a prescription for a drug that was approved for purchase without one. The best solution to this faulty clause is immediate repeal.”

Jackson is CEO of WageWorks Inc., one of the country’s biggest FSA administrators.

Jody Dietel, chief compliance officer at WageWorks, notes that expenditures permitted through tax-free FSAs and HSAs include insurance co-pays, prescription medication and diabetic supplies.

Dietel knows the value of these accounts firsthand, having used them to treat diabetes, high blood pressure and asthma. “The number of office visits, prescription drugs and out-of-pocket medical expenses I had were numerous and expensive,” she says. “These accounts are important.”

–Paul McDonnold and John Egan