New restrictions on flexible spending accounts

The health-care overhaul has taken some of the flex out of flexible spending accounts, which let workers pay medical expenses with pretax dollars. Starting in January, you'll no longer be able to use your FSA for over-the-counter drugs and medicines unless you have a doctor's prescription.

Experts agree that the new rules are likely to discourage people from tapping their FSAs for routine purchases of aspirin, vitamins, cough medicine and other drugstore essentials.

Whether they also inhibit people from taking needed allergy or heartburn medications, for example, or from picking up nicotine replacement gum to help them quit smoking, remains to be seen.

In any case, as you calculate during the fall insurance enrollment period how much to deposit in your FSA next year, it's important to keep the new restrictions in mind.

A way for feds to raise revenueMoney prompted the change, experts say. "I think federal officials were just looking for revenue raisers," says Mike Thompson, a human resource services principal with PwC. As employee contributions to FSAs are made on a pretax basis, they reduce earnings and thus the amount workers pay in income tax.

Tightening up the tax break on over-the-counter purchases will generate an estimated $5 billion in federal revenue through 2019, according to the Joint Committee on Taxation. That represents revenue related not only to FSAs but also to health savings accounts, health reimbursement arrangements and Archer medical savings accounts, all of which are also affected by the change.

Under the law, reimbursement changes apply to expenses incurred for an over-the-counter "medicine or a drug," although it specifically exempts insulin. Also, the IRS says the new restrictions don't apply to such medical equipment and supplies as crutches and bandages or to diagnostic devices such as blood sugar test kits. The IRS has posted further details at www.irs.gov; type "over-the-counter medicines" into the search box.

Annual cap to be loweredAccording to Mercer's annual survey of employer-sponsored health plans, 27 percent of all employers offer FSAs; among companies with 500 or more employees, 85 percent do so. The average employee contribution last year was $1,424, according to Mercer. Although the IRS doesn't limit the amount employees can set aside in an FSA, many employers impose an annual cap of $5,000, experts say. Starting in 2013, FSA contributions will be capped at $2,500.

People with allergies, those who suffer from heartburn and people on low-dose aspirin therapy for cardiovascular problems are among those who will be most affected by the new restrictions, says Roland Goertz, president of the American Academy of Family Physicians. Now they'll need a prescription for that antacid or antihistamine if they want to use their FSA accounts.

Kim Schmidl-Gagne, of Keene, N.H., says she and her husband live paycheck to paycheck.

"I don't get how this change helps working families," she says.