20 Jun Bigger Changes May Be in Store for FSAs

A recent IRS clarification regarding contribution limits for some health flexible spending accounts (FSAs) comes at a time when the agency and Congress are seriously rethinking some of the other constraints to the accounts.

In late May, the IRS released a notice that clarified that the $2,500 annual contribution limit to FSAs that was imposed by the Patient Protection and Affordable Care Act (PPACA) is effective for plans that begin in 2013 — meaning noncalendar-year plans in 2012-2013 do not have to comply, according to a post on the E is for ERISA website.

That change, however, may do little good for proactive employers with noncalendar-year plans that already made adjustments. The notice does not contain guidance about changing the contribution limit midyear, so it appears that employers that made changes to the contribution limits at the start of the 2012-13 plan year must stick with them, according to ftwilliam.com, a division of Wolters Kluwer.

This adjustment could be the first in a number of significant changes to rules governing FSAs. The IRS is considering a change to the “use-it-or-lose-it” rule, which requires participants to spend their FSA balance annually or lose the money, according to a report in Business Insurance. The report notes that the IRS acknowledges that the cap under PPACA “limits the potential for using health FSAs to defer compensation,” and so a rework of the use-it-or-lose-it rule likely is due.

The U.S. House of Representatives also is stepping into the debate, as legislators recently passed a bill that would ease the use-it-or-lose-it rule, according to Business Insurance. The House bill allows workers to withdraw up to $500 in unused balances from the accounts, although the funds would be taxable.

The bill also abolishes an unpopular rule that restricts the purchase of over-the-counter medications with FSA money. Under the PPACA rule, tax-advantaged health accounts, including FSAs and health savings accounts, cannot be used to purchase over-the-counter medications without a prescription. The bill strikes that provision from the law, the Business Insurance report said.

However, the Obama administration already has pledged to veto the bill if it makes it through the Senate because the legislation also would eliminate a tax on makers of medical devices — a tax that the administration sees as vital to funding the health care reform law, according to a Workforce online report.