Legislation to Repeal Limits on HSAs and Health FSAs Introduced in the Senate and the House
Earlier this year, legislation was re-introduced in the Senate (S. 312) and the House (H.R. 605) to repeal two provisions in the Patient Protection and Affordable Care Act (“PPACA”)(“health reform”). The provisions targeted by the bill limit the amount that can be contributed to Health Flexible Savings Accounts (“Health FSAs”) and prohibit individuals from using funds in their Health FSAs, Health Savings Accounts (“HSAs”) or Health Reimbursement Arrangements (“HRAs”) to purchase over-the counter medication.
Senator Kay Bailey Hutchison and Representative Erik Paulsen first introduced the bills in 2010, but no action was taken on the bills in that session of Congress. Unfortunately, the same may be true for this legislative session; the bills were introduced in February 2011, but remain in committee.
1. Abolishing the $2,500 Limit on Contributions to Health FSAs
The re-introduced legislation is called the Patient’s Freedom to Choose Act. If passed, the bill will abolish the $2,500 limit on employees’ annual salary reduction contributions to Health FSAs offered under cafeteria plans.
The provisions of the PPACA, which established the $2,500 limit, will become effective for taxable years beginning after December 31, 2012. The health reform law’s grandfathered plan exception does not apply to this requirement; all Health FSAs offered under cafeteria plans must comply.
Over 35 million people have Health FSAs and 85% of all large employers (those with over 500 employees) offer them as a benefit to their employees. Before health reform was enacted, there was no federal cap on salary reduction contributions to a Health FSA.
Over 80 percent of all large employers that offer a Health FSA to their employees include a limit that is over the $2,500 threshold; the median limit on Health FSA benefits offered by employers is $4,500. Federal employees can contribute up to $5,000 to their Health FSAs and state employees in 46 states have Health FSA contribution limits set at $3,000 or more. Therefore, the $2,500 limit is a significant reduction in the amount that employees may contribute.
2. Abolishing the Ban on Reimbursements for Over-the-Counter Drugs
The PPACA also restricted reimbursements under Health FSAs, HRAs and HSAs to insulin and drugs prescribed by the patient’s physician. This limitation eliminated reimbursements for over-the-counter drugs. Many plan participants routinely buy over-the-counter drugs such as aspirin, allergy pills and acid reflux medication at their plan’s year end to use up contributions made to a Health FSA, to avoid the plan’s “use it or lose it” rule. Eliminating the reimbursement for over-the-counter drugs does away with this “easy spend” option and will undoubtedly cause more participants to forfeit a portion of their account balances.
Other participants are asking their doctors for prescriptions for aspirin and other over-the-counter drugs. This demand for prescriptions for non-prescription drugs is leading physician groups to push to repeal the restriction.
“Allowing individuals the flexibility and freedom to use health benefit accounts without contribution caps or the additional expense of an office visit to their physician have helped make these accounts so popular,” Senator Hutchinson said. “Patients were promised more choices and flexibility when the health care bill passed, but these provisions stifle both. My bill puts patients back in charge of how and when they’ll use their HSA or Health FSA benefits, and it prevents the federal government from imposing arbitrary caps that raise patients’ health care costs.”
Both restrictions were added to generate additional tax revenue to help pay for health reform. Any effort to repeal the measures will likely have to identify other revenue sources to replace the revenue lost by eliminating the restrictions.