Redesign of Flexible Spending Accounts

by Dual Income No Kids on June 26, 2009 · 0 comments


Most Americans are pretty familiar with Flexible Spending Accounts, designed by the government to provide some tax relief for health and child care related expenses. While this intervention seems understandable on the outset, there are a great many of the actual details related to FSAs that aren’t geared towards benefiting consumers.

Use it or Lose it. By far the biggest issue around FSAs is the stipulation that funds must be used within the annual year established by your employer or health care provider. This means that you are forced to spend what you’ve elected for deductions, otherwise this money goes into a great FSA abyss.

Predetermined Limits. While these are set by individuals, one must decide before the beginning of the program year how much they will need to deduct. This means getting out the crystal ball for your family’s health care needs and predicting what you will spend for the year. Obviously there is the likelihood of either over or under estimating this depending on whether your expenses were less than expected, or a medical issue came up part way through the year.

No Flexibility. Despite what the name implies, should you discover part way through the year that your expenses might be more or less than expected, you have no ability to change course once you’ve decided on your deductions for the year.

Geared towards Pharmaceutical Industry. Since it is a use or loose system, this means that hundreds of thousands of dollars are spent by those who have elected to deduct too much. They end up buying life time supplies of bandaids and Costco sizes of cough syrup.

An example of how this all goes wrong in the system can be seen by my dear twin sister. Since my sister was pregnant at the time of her annual elections, she estimated what her expenses would be for a hospital birth. As it happened, they ended up opting for a home birth where there was actually not a dime out of pocket for the delivery from trained midwives. While a great experience and outcome on the one side, this has left my sis with $2k worth of FSA that she has to spend before her annual plan soon comes to a close. Not enough to consider lasik surgery, she is left with buying glasses she isn’t really in need of and stocking up on medical supplies. Obviously this is better than sending her hard earned money back to the feds, where this goes we still don’t know, but it isn’t a good option.

On the flip side, if one gets pregnant right after their annual election period, that means they would not be able to deduct any of their expenses.

Childcare Expenses. Another part of FSAs are for childcare related expenses. While I’m not as familiar with all of the issues around this, I am aware that the maximum limits set for $5k annually, when the average is $8k with many paying closer to $20k. Obviously this is outdated and needs to be updated according to reasonable limits and then adjusted for inflation.

Redesign. My main suggestion for FSAs, which is really a no brainer, is to establish a truly flexible spending account system for health care expenses where one could put a little away at a time and then have those expenses available for anyone within the family years out into the future. I believe that this would save the health system a great deal of resources, as well as cut back on the difficulty faced by so many with unexpected or high health care expenses.

Readers: If you have experiences or suggestions around FSAs we would love to hear them.

In Good Health,

Miel

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