Popular FSAs May be Less so with ACA Changes

This year brings changes to flexible spending accounts (FSAs) – the workplace arrangement that allows employees to save, pre-tax, for expected medical expenses. You contribute to an FSA through a monthly paycheck deduction by your employer, then the account is available to you for medical expenses, and you are not taxed on it.

As a result, FSAs have been popular, but changes to the Affordable Care Act (ACA) could make them less attractive:

Reduced contributions

Under previous rules, your employer could deduct any amount, usually $3,000 to $5,000 a year. Now FSA contributions are limited to $2,500 a year, adjusted annually for inflation.

Over-the-counter meds

You may recall that FSA dollars could be used for over-the-counter medications up to 2011; since then, FSA dollars can only be used for prescription medications.

Use it or lose it

You must use your FSA dollars by the end of the year, or they revert back to company control.

Who should contribute

Flexible spending accounts may make sense for families with steady, recurring and/or predictable health spending needs that aren’t covered by their medical insurance policies – including deductibles.

If you or a family member has regular health expenditures or needs orthodontic care, you may want to consider contributing to an FSA. But don’t over-contribute. You’ll run into the use-it-or-lose-it provisions.

If you’re not sure about FSA changes and how they affect you, your advisor can help you understand your options.