A recent proposal from the Senate Committee on Finance recommends eliminating flexible spending accounts (FSAs) as a way to help fund costs for health care reform efforts.  If enacted, this proposal would negatively affect many Americans who rely on FSAs to manage and pay for their health care costs not covered by insurance…in essence an increase in taxes at a time when many can least afford it.

According to the Daily Kos, “The Joint Committee on Taxation told Senate leaders recently they could collect $68.6 billion over 10 years by abolishing the accounts, along with separate ones in which employers contribute money for workers to use for health care expenses. Eliminating both types of accounts would pay for four percent or more of the estimated $1 trillion to $1.5 trillion cost of expanding coverage to the 46 million uninsured.”

The search for revenue is revisiting the debate over FSAs, HSAs and other medical savings accounts. Sparking controversy from some healthcare critics, they say these accounts are actually tax shelters for the rich and encourages spending on unnecessary or otherwise frivolous expenses. On the other hand, proponents of these plans say that flexible spending account programs help people pay for high medical expenses that aren’t covered by insurance.

The Daily Koz reports the debate is further complicated by the fact that “the government doesn’t track even basic details on how the accounts are used, how much money is involved and what happens to the unspent funds. The only data available come from the industry-the companies that administer the programs for employers. Even that information is incomplete.”

According to a July 16,2009, Bloomberg news report “The House Ways and Means Committee is proposing to prohibit reimbursements for over-the-counter drug purchases using pretax health-spending plans.

The proposed limits, affecting employer-sponsored flexible spending accounts and privately owned health savings accounts, were added to a 1,018-page bill aimed at overhauling the health- care system. ”

The proposed limit would raise $8.2 billion over a decade, according to official estimates. It would supplement a proposal to increase taxes on the highest-earning Americans, including a 5.4 percent surtax on couples who earn more than $1 million.”

Stay tuned…

A flexible spending arrangement (FSA), or Flexible Spending Account, as they are commonly called, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States. Flexible spending accounts allow an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes, resulting in a substantial payroll tax savings.

The most common FSA, the medical expense FSA (also known as medical FSA or health FSA), is similar to a health savings account (HSA) or a health reimbursement account (HRA). However, while HSA insurance plans and HRAs are almost exclusively used as components of a consumer driven health care plan, medical FSAs are commonly offered with more traditional health plans as well. An FSA may be utilized by paper claims or an FSA debit card also known as a Flexcard.

According to Celent, as of May 2006, there were approximately 6 million debit cards in the market tied to an FSA account, representing 25% of the FSA participating community. The outlook for FSA cards in the near future is optimistic. FSA cards will increase FSA adoption rates. The average card participation rate was around 20% as of May 2006. By 2010, it is projected this rate will increase to 85%.