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Flex spending accounts less flexible under new health law

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For about the past 20 years, many employers have offered employees so-called, "flexible spending accounts" - accounts that allow workers to put aside pretax earnings specifically for out-of-pocket heath care expenses. But the federal health care reform law is cutting back on what those accounts will cover and how much workers can put into them.

Those changes could be particularly relevant to many Minnesotans who are deciding which health care plan to choose during November, a common open enrollment period.

Flexible spending accounts are not for the faint of heart. They're a spin on the health care roulette wheel for a year's worth of out-of-pocket medical expenses. While workers can use untaxed earnings to pay for costs their health insurance polices don't cover, they must decide in advance how much money they'll need for the coming year. What they don't use, they lose. 

But for Carol, who did not give her last name over worries that speaking publicly would jeopardize her livelihood, the risk has been worth it. 

Carol, who lives in the Twin Cities, suffers from chronic respiratory problems and this year she expects to spend about $700 to cover co-pays, deductibles, and over-the-counter medicine. It's effectively cheaper to use the flex account, because she paid no taxes on that money.

"It allows me to recover otherwise taxable expenses that wouldn't be available to me if the flex account wasn't there," Carol said. 

But the health care reform law will change how Carol can use her flex account next year and beyond. She'll still be able to use it for co-pays and deductibles, but starting in January she'll need a doctor's prescription for each medicine she buys over the counter. She finds it ironic that many of the over-the-counter medicines she now takes once required prescriptions. 

"If I have to go bother my medical physician for every over-the-counter medicine I need, that seems to be counter-productive," Carol said. "That's taking her valuable time away from critical medical services to fill out paper work"

Right now most employers cap flex accounts at $5,000, even though there is no required limit. But beginning in January 2013, the health care law will cap flex accounts at $2,500. 

These two changes are designed to raise more tax revenue to help pay for insuring another 32 million Americans beginning in 2014. The Congressional Budget Office and Joint Committee on Taxation estimate these changes will allow the government to raise about $19 billion between now and 2019. 

The idea behind the flex cutbacks was to raise revenue from a group of people that are generally better off financially than others, said University of Minnesota health economist Jean Abraham.

"These are accounts that are offered alongside employer-based health insurance and what we know is that individuals who have employer-based health insurance tend to be higher income than those without," said Abraham, who served on the President's Council of Economic Advisors specializing in health care during both the Bush and Obama administrations.

But the change could have some unintended consequences, Abraham said. Relatively few employees use these accounts, but many of them who do suffer from chronic illnesses and rely heavily on the accounts. 

"Statistically it's not many, generally less than 20 percent of employees have anything in a flexible spending account but the small number who do can have very big expenses," said Helen Darling, President of the National Business Group on Health. 

For her part, Carol doesn't consider her expenses very big. The ability to pay them with pretax dollars is important to her though, so last week she went to the doctor and got prescriptions for about a dozen over the counter medicines.

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Q & A:  Flexible spending account changes

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