As the end of calendar year 2012 approaches, it is time to think about holiday cheer and employee benefits. Employees who set aside funds in a health care flexible savings account have until the end of the plan year to use those funds or lose them. Most employers’ calendar year plans will permit claims for the 2012 funds until March 15 of 2013, but the money has to have been spent on eligible items before December 31st or it will be forfeited by the employee.
Employees who have some unclaimed dollars in their FSA accounts can use the funds by seeing the doctor, refilling prescriptions, and buying medical equipment. What the funds cannot be spent on, however, is over the counter medications. OTC medications have been excluded from FSA coverage since January of 2011, unless the employee has a doctors’ note verifying medical necessity.
Another time honored fall employee tradition is open enrollment. This year open enrollment decision making has been complicated by FSA changes stemming from the Affordable Care Act. The existing change is that FSAs have been capped at $2,500 starting in January of 2013. In addition, the IRS is taking suggestions for other modifications to FSA rules.
One reason FSA funds have been subject to forfeiture at the end of each plan year has been to limit the amount of money employees could shelter from payroll taxes. Now that FSAs have an external limit of $2,500, the IRS is reconsidering the forfeiture requirement. Also under consideration is a rule that would permit reimbursement of up to $500 of unused FSA funds to the employee (those funds would then be taxable, of course).
Bigger changes for FSA might also be coming in the future. True implementation of the Affordable Care Act (also known as ObamaCare) has been up in the air while the country waited for two things. The first was a Supreme Court decision on the constitutionality of some of the elements of the Act. The second was the reelection of President Obama. Both results seem to have confirmed the reality of the Affordable Care Act, so there will undoubtedly be more Act-related regulation.
An early version of ObamaCare abolished FSAs completely, and there are still arguments in favor of that idea. Experts opposed to FSAs say that the administrative cost to employees, employers and the IRS far outweighs the relatively minor tax savings to employees. Some call for simply replacing the entire program with a small employee tax break instead. They claim that eliminating FSAs will help to fund the additional costs of ObamaCare.
Experts in favor of FSAs point out the irony of proposing to help pay for affordable care by eliminating an existing program employees can use to make care more affordable. Proponents say that FSA funds are used by the middle class to help pay for dental care and prescriptions and medical copays. Opponents say that FSA funds are used frivolously by those who are well off on extra pairs of glasses and optional surgical procedures. Common sense says both of those statements are true.
Regardless of future changes, for this year, employees should make their medical services lists, check them twice, and make sure to get those FSA funds reimbursed.