Health care costs: Flexible spending accounts get more flexible

Treasury Secretary Jacob Lew

The federal government’s balky new online health care apparatus is catching its fair share of flak.

Flex facts

Flexible spending account background: Employers aren’t required to offer flexible spending accounts. For those that do, workers decide during their benefits enrollment period how much pretax pay to contribute for the next year, up to $2,500. A debit card is used to draw from the account for qualified expenses. Experts suggest keeping all receipts in the event of an audit.

No hoarding: Under the looser rules, the most that can be carried over is $500. That way, the maximum in any year won’t exceed $3,000.

Pick one: Employers now can offer either a 2.5-month grace period, the 12-month $500 carryover or no grace period at all.

On the web: tinyurl.com/mrz3jgr

There’s no such squabbling about a lesser-known change it recently made to the old system, to a program based on the quaint notion of saving for a rainy day.

The Treasury Department and the Internal Revenue Service announced Oct. 31 they’re now offering a new option to the “use-it-or-lose-it” rule for flexible spending accounts that some employers offer.

The pre-tax dollars that workers funnel into these voluntary plans — the annual limit is $2,500 — can be used to pay for or defray eligible medical expenses not covered under their standard insurance policies. Co-payments, eye exams, glasses, medicine and dental work all could qualify.

To prevent hoarding of untaxed cash, the government requires participants to drain the accounts by the end of the calendar year or shortly thereafter. Otherwise, any untapped cash is forfeited to the employer, which bankrolls the accounts.

The only exception until now had been a two-and-half month grace period.

The new twist is that employees can now carry over as much as $500 for an extra 12 months, raising their potential out-of-pocket spending power to $3,000.

“Across the administration, we are always looking for ways to provide added flexibility and common-sense solutions to how people pay for their health care,” Treasury Secretary Jacob J. Lew.

Now, workers could get another full year to figure out how to best deploy the unused cash, reducing the likelihood of a late December spending spree at the corner drug store.

“It’s very positive,” said Mike Harris, vice president of major group sales at Columbia-based health insurer BlueCross BlueShield of South Carolina. Harris acknowledged even he’s left a few bucks on the table in the past.

While state figures aren’t available, the government estimates that 14 U.S. million families contribute to flexible spending accounts. Harris said about 9 percent of his clients offer them, and, of those, half offer the grace period.

Most forfeitures total less than $500, according to the government.

The Treasury Department said the latest change was based on public comments that it and the IRS sought out. Much of the feedback from workers, employers and others suggested that the 30-year-old use-or-lose policy be loosened.

One constant theme was the difficulty of predicting health care costs in a given calendar year.

Naturally, the change comes with a catch: Employers can’t offer both the grace period and the 12-month carryover.

“They have to pick one of the ... options,” Harris said.

Timing is another issue, at least this year. Most employers have already finalized their benefit sign-up plans for 2014, so it’s unlikely many will offer the carryover, said Tim Timmons, vice president of human resources and workforce policy at the S.C. Chamber of Commerce.

“You’re going to hear that a lot because everyone now is almost in open enrollment,” Timmons said. “While it’s not a huge change, it is a change. I think you’ll see more employers take advantage of it next year.”

He also predicted the added flexibility could spur more workers to sign up as they become aware of it.

“Employees have been hesitant to use these accounts because of the use-it-or-lose-it rule,” Timmons said.

It’s kind of fitting that the government picked Halloween to tinker with the old health care system, without scaring up as much as a “boo.”

Trick or treat? In this case, a small treat.

Contact John McDermott at 937-5572.

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