Nonprofit Group Working to Preserve Pre-Tax Flexible Spending Accounts

An $8 billion revenue-raising provision in the House Democrats' health care bill (H.R. 3200) to limit the use of pre-tax health spending plans has given way to a lobbying campaign that sponsors hope will preserve the benefit, or at the very least minimize the impact of proposed changes.

Specifically, the provision approved by the Ways and Means Committee would exclude over-the-counter medicines from eligibility for reimbursement from health reimbursement arrangements, health flexible spending accounts, health savings accounts, and Archer medical savings accounts (136 DLR A-6, 7/20/09).

“We obviously would like to have FSAs come out of this debate untouched, unscathed,” said David Carver, the executive director of the Employers Council on Flexible Compensation. “Our whole point is to be participatory and make sure we communicate what we think.”

Carver said although the House proposal applies to multiple types of tax-advantaged health care savings plans, within his membership FSAs are the most prominent benefit. ECFC, a nonprofit organization dedicated to maintaining and expanding tax-advantaged accounts, stated that at least 35 million participants would be affected by the change, while congressional Republicans have said the figure could be upward of 50 million.

What Are FSAs?
FSAs, first created in 1978, allow employees to reduce their monthly pay by a chosen amount and then use those dollars tax-free to pay for certain medical expenses.

The program was expanded in 2003 when the Internal Revenue Service added over-the-counter drugs to the list of tax code Section 213 eligible medical expenses.

Currently, IRS allows employers to determine the annual cap for FSAs. Because rollovers are not permitted, under a “use-it or lose-it”policy, at the end of the year, if an employee cannot spend down his or her account, the money becomes the employer's.

Proponents like ECFC say the plans help people meet the costs of their health care needs with pre-tax dollars. Opponents, like some congressional Democrats, say they are tax shelters for the wealthy.

Embarking on Educational Campaign
The House is not alone in contemplating changes to FSAs to help pay for a roughly $1 trillion overhaul of the health care system.

“That's not something we're looking at,” Finance Committee Chairman Max Baucus (D-Mont.) said of the House plan. “We have been looking at FSAs, but that's not part of it.”

In mid-May, the Finance Committee issued an “options paper”of potential offsets, including eliminating or limiting the amount of salary reduction contributions to FSAs and HRAs.

In response to the discussions in both chambers, Carver told BNA Aug. 3 that ECFC recently began a newspaper advertisement campaign in the Washington, D.C., area to educate Congress and the public on the benefits of FSAs, noting in the ads that they “pay for essential out-of-pocket health expenses” such as doctor visits, hospital admissions, drugs, dental work, and eyeglasses.

Proponents like ECFC say the plans help people meet the costs of their health care needs with pre-tax dollars. Opponents, like some congressional Democrats, say they are tax shelters for the wealthy.

Hoping to take the campaign to other parts of the country, Carver said the reception to the ads and face-to-face meetings has been “fantastic.”Lawmakers, he said, “want to know what they're voting on.”

Different View by Party, Sometimes
The provision to limit the reach of tax-advantaged plans was added at the Ways and Means Committee markup by Rep. Jim McDermott (D-Wash.)to pay for a provision extending tax benefits for employer-provided health care to domestic partners.

Ways and Means Committee ranking member Rep. Dave Camp (R-Mich.) recently told BNA he would like to see the provision eliminated if the health care legislation advances. He said allowing FSAs to be used for over-the-counter drugs helps keep health care costs down because rather than getting a prescription, an individual can go to the pharmacy and get medicine off the shelf. “That is a lower-cost treatment for your condition and if that does take care of it, you might not need to go to the[emergency room] or go to the doctor.”

Carver agreed, calling the price differential between prescription drugs and over-the-counter drugs “unbelievably large.”He said some lawmakers “don't seem to be looking at it from how the consumer's behavior may be impacted by something like this.”

He said the change represents an “absolutely wrong direction to take health care policy,” and noted that it would violate President Obama's pledge not to raise taxes on incomes below $250,000.

On the other side, committee member Rep. Artur Davis (D-Ala.) said he believes tax-advantaged accounts work well for a “small group”of taxpayers, notably “people who are high-income, very healthy, and very young.” Davis said “those aren't, frankly, the people that I think we're trying to serve by expanding access to coverage.”

Carver disagreed, pointing out that the average annual income of an FSA participant is $55,000. He said two “myths” about FSAs really bother him. The first is that they are for the rich. FSAs, he said, “are subject to discrimination testing, meaning the highly compensated cannot abuse them because they cannot get access to them unless the people that would be in the nonhighly compensated category are participating, effectively eliminating their ability to abuse them.”

The second “myth,” he said, is that they are regressive. “The tax code is regressive,” Carver said. “If you want to fix regressive, fix the tax code.”

But legislation (H.R. 2526) introduced this year by Democratic Caucus Chairman John Larson (Conn.), a member of the Ways and Means Committee, to increase participation in medical FSAs demonstrates that the issue does not always fall along party lines. The bill is co-sponsored by Camp, and committee members Reps. Ron Kind (D-Wis.) and Charles Boustany(R-La.).

‘Save My Flex Plan.'
Just days before the Ways and Means Committee approved its bill, ECFC created a separate website, savemyflexplan.org, to serve as the centerpiece of its grassroots campaign.

The website allows visitors to send e-mails to Obama, Vice President Joe Biden, senators, and House members urging them to “protect”tax-advantaged health spending plans.

Carver said traffic to the sight has been in the tens of thousands but he expects it to increase after his group's recent annual flexible benefits administrators' symposium.

ECFC also employs Mehlman Vogel Castagnetti Inc., a lobbying firm, which Carver said assists with “fly-ins,” where members from around the country visit the Capitol to meet with lawmakers and staff to discuss tax-advantaged accounts.

Working on Possible Compromises
Carver said ECFC has a number of proposals that it could live with in the event that Congress chooses to modify FSA rules.

For example, rather than forcing taxpayers to use their money or lose it, allowing them to receive their money back, up to a certain amount, and taxing it would result in the government's raising revenue.

“Our statistics show people are not putting in enough money,”Carver said. “Most balances are all the way down after the first quarter.”

Giving the money back to the taxpayers would make people more efficient consumers of the health care system, he said. “The more we take them out of the price loop, the farther away they get from the costs associated with the services they're receiving in health care. We'd like them to be more participatory.”

Boustany, a cardiothoracic surgeon, told BNA that he would like to see a rollover added to the law, which he believes would boost enrollment. Camp agreed, saying the spend-down requirements of the current system stifle enrollment.

ECFC opposes placing a cap on FSAs, with their ads noting that “FSAs ensure working class Americans will be able to afford the care they need to treat chronic illness.”

A cap of between $3,000 and $5,000, as long as it is indexed to price inflation for medical services, would be “workable,” he said. But if Congress chose the lower level, then they should consider the “use-it or lose-it” rules. “There are a lot of moving parts and we're trying to be part of the solution,”he said.

Larson said the provision to keep the accounts but remove over-the-counter drugs from the allowable expenses category was itself a compromise over an initial plan to cancel the entire program. “But I think there was significant pushback in terms of the number of people, teachers and firefighters, people through our credit union who use these savings and do it responsibly, which is why I feel so strongly about it,”he told BNA.

He said he would continue to push his FSA-expansion bill. “We never give up. It's just in the push and shove of legislation and compromises this is what happens.”

In the meantime, ECFC's Carver also will be engaging in the push and shove of legislation. “We understand what they're trying to undertake here, what the president's trying to do,” Carver said. “I really thought that we were part of the objective on health care reform, not part of the problem.”

By Heather M. Rothman and Brett Ferguson