Employee Flexible Spending Accounts To Get New Rules
MICHEL MARTIN, host:
I'm Michel Martin and this TELL ME MORE from NPR News.
In a few minutes, we'll tell you about the emotional debate over whether to change the name of a school mascot. For 80 years, the teams at the University of North Dakota at Grand Forks have been known as the Fighting Sioux. The NCAA has come to agree with Native Americans who say that mascot is offensive. But other members of the same tribe like the mascot and say it celebrates their heritage. We'll have that conversation in a few minutes.
But, first, our money coach. Today, we're talking about one of the ways the new law will change how Americans pay for health care. For years, millions of workers, including those of us who work here at NPR, have had the option of using flexible spending accounts, or FSAs, to pay for everything from prescription drugs to eyeglasses with pretax dollars.
But beginning on January 1st, the rules governing FSAs will change. To talk more about this, we turn to our money coach Alvin Hall, our regular contributor on matters of personal finance and the economy. And he's with us from London, where he remains stuck because of volcanic ash. Welcome back.
ALVIN HALL: Thank you. I think I need a flexible spending account at this point.
(Soundbite of laughter)
HALL: To cover the hotel cost.
MARTIN: Oh yeah. Well, yeah. Well, I don't think that's going to help you. But, so how popular are flexible spending accounts and who uses them?
HALL: Eighty-five percent of companies with more than 500 employees actually use the plan. But what's interesting, according to some statistics I've read, about 20 to 25 percent, maybe closer to 27 percent of people actually use the plan. And of those in the plan, the average account balance is $1,400.
MARTIN: Why is that? I mean, it seems to me that this is a beneficial, this is something, a real benefit to people. And what you're saying is that most big companies offer them. But only a minority of workers use them.
HALL: I think that most people really don't understand how these accounts work. And I think they don't want to take the time to try to plan for their health care cost. The FSAs are a wonderful plan. You can put money away into the plan and when you put it in, it avoids federal taxes, some state taxes and Social Security taxes. So, automatically you start out with a 20 percent reduction in the cost of the money or the services that you buy with the money in this plan.
MARTIN: And these accounts aren't unlimited. It has to be said that there are limits on how much workers can set aside. As I understand it, the top limit is what, $5,000 per year?
HALL: Five thousand dollars. But that's more of a company issue. The federal government actually did not put any limits of the plan. They left that to the responsibility of the corporations.
MARTIN: And so, what are the major changes we'll see starting next year, January 1?
HALL: Starting next year, that great end of the year rush of people to spend whatever money they have left in their flexible spending plans, that will change forever. It will still remain a plan that says if you don't use it, you lose it. So, people will run out and buy things, but starting next year, you will no longer be able to buy over-the-counter medications. You will no longer be able to buy anything that's not prescribed by your doctor. That part is still being worked out a bit.
Could it be something that the doctor recommended or could it be something that the doctor actually prescribed? That's still being worked out. But you will no longer be able to go out and buy all those sunglasses at the end of the year, piles of vitamins at the end of the year, all the things we used to buy. That's a major change for most people.
MARTIN: What about drugs that used to be prescribed that then moved to over the counter, a number of allergy medications have fallen into that category.
HALL: Yeah, like Claritin.
MARTIN: Or Zyrtec.
HALL: And Benadryl, I think. Those will no longer be covered at all. And this gets to the heart of this new plan. In order for you to take most advantage of it, you need to sit down with your doctor or within the family and look at the type of medications that you use, and to see how much you need to put into the plan in order to be able to get them at this reduced cost. But you have to sit down and plan it. And I think most people don't take the time to do that.
MARTIN: And another big change is starting in 2013, the annual limit that any employee may contribute to these plans will be restricted to $2,500. That's half of what some companies have been allowing employees to set aside that. What's the logic behind that?
HALL: The logic is that some of the money that people had been putting into the FSAs, that money would be better used to cover overall health costs for everyone. And because the new plan will cover more of the cost, people don't need so many deductions. They don't need so much pretax advantage money anymore. So the government will say, this will help pay for the overall plan for everybody because we are all getting more benefits.
MARTIN: But some people will be affected by this. Who are the people who are likely to be affected by this?
MARTIN: I mean, the first thought that comes to mind for me are people with teenagers who need braces.
HALL: Yes, because a lot of people use their FSAs to cover braces, eyeglasses, all of those types of things. The people I think about are those people who have chronic diseases, who are on prescription medication and large amounts of it. So, less will be available. So you'll have to find different ways to pay for that.
Hopefully the co-pay on some of these prescription drugs will go down and maybe that will offset it under the new plan.
MARTIN: The other thought that occurs to me are people who are using assisted reproduction technologies because those medications can be extremely expensive and that's something that you can forward plan for. I wonder whether there was any discussion about the effect on specific populations of this.
HALL: If the drugs used in this are prescription, which they always are, it would seem they would be covered by the plan. But I've seen nothing specifically to talk about those particular population.
MARTIN: What I'm hearing you say is that some of the details are still being worked out. But are there ways that patients who do have a chronic needs for medication can strategize to still minimize the big increase in cost that they may be experiencing as a result of these new rules.
HALL: Yes. Talk to your doctor or your health care provider. Try to come up with a plan or schedule of the medicines that you have. Then start putting money away to cover the maximum amount that you can. Also look at the use of generic drugs, if they're available at a lower cost. And find out now if you can from your employer or from somebody who knows the legislation well, what will be the amount of co-pay and then start budgeting for this new world that we will enter.
MARTIN: Our financial guru Alvin Hall joined us from our studios in London where he's cooling his heels waiting for the clouds to lift. Alvin, thanks so much for joining us.
HALL: Glad to be here. Hope I'm home by next Tuesday.
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