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US Senate Eyes Curbs On Tax-Free Health-Spending Accounts

By Martin Vaughan, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Employees who enjoy unlimited tax-free treatment of out-of-pocket medical expenses through employee-benefit plans could be facing new curbs on the tax subsidy in health-care overhaul legislation.

Senate Finance Committee Chairman Max Baucus, D-Mont., is proposing to rein in so-called flexible-spending plans in legislation his panel is slated to take up next week.

The new limits might make employers think twice about whether to even offer flexible-spending accounts as a perk, say employee benefits advisers.

The tax-free accounts can be tapped to pay for expenses that aren't covered by an insurance plan - ranging from office co-pays, deductibles and medication, to orthodontia and fertility treatments. A June 2009 survey by the Society for Human Resource Management found that 71% of firms surveyed offered the plans.

But the actual percentage of employees who enroll in the plans is much smaller - about 20% of those who have access to them.

Baucus' proposal would cap annual contributions to the accounts at $2,000. Currently there is no statutory limit on the amounts employees can contribute, but some employers - including the federal government - cap their plans at $5, 000 annually.

A Senate aide said the proposed cap is a matter of fairness - retirees, the uninsured and those who buy health insurance in the individual market cannot benefit from the tax break.

The aide also noted that the average employee contribution for those enrolled in a flexible-spending account, or FSA, is $1,200.

"Unfortunately, those affected by the cap will be the ones that need [the tax subsidy] most - those with chronic illnesses," said Jody Dietel, chief compliance officer for Wage Works, Inc., an employee-benefits administrator.

Besides patients with high plan deductibles and those with chronic illness, the plans can deliver significant tax savings to people planning for a one-time or time-limited event, such as orthodontia or lasik eye surgery.

Benefits administrators have banded together to lobby against proposed curbs on flex-spending plans.

Dietel said one in five employees enrolled in plans administered by Wage Works contributes more than the proposed $2,000 annual cap. She said those employees would see their taxes go up by $482 on average.

However, employers' appetite to include the tax-free plans in benefits packages would be more affected by a second Baucus proposal.

In an outline released last week, Baucus proposed a 35% excise tax on high- cost health benefits plans, to be paid by health insurers, or in the case of a company that self-funds their plan, by the third-party administrator.

The tax would apply on employer-provided health-insurance premiums above $8, 000 for individuals, or $21,000 for a family of four. In addition to the premiums, contributions to health flexible-spending accounts would count toward that threshold.

Importantly, while employers have control over the cost of health-insurance plans that they offer, contributions to flex spending accounts are at the discretion of the employee.

"It's very likely that some employers would drop health FSAs, because they wouldn't want employees on their own to push them into a position where they would have to pay a tax," said Susan Relland, an employee-benefits lawyer with Miller and Chevalier.

A third Baucus proposal would remove over-the-counter medication from the list of eligible expenses for FSA funds, unless there is a prescription. A similar provision is part of legislation moving through the House.

FSAs have sometimes been criticized for encouraging unnecessary spending because of a feature known as "use-it-or-lose-it." Employees decide how much to contribute at the beginning of a plan year, and amounts not used up by the end of the year are forfeited to the employer.

That feature has spawned anecdotes of frantic employees filling up their shopping carts in drugstore aisles in an effort to spend remaining balances. But Dietel said there is no evidence that this is a common scenario.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@ dowjones.com

  (END) Dow Jones Newswires
  09-15-091644ET
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