Five Must-Fix Items in the Affordable Care Act

When then-Speaker of the House Nancy Pelosi uttered the comment “We need to pass this bill, so we know what’s in it,” few Americans clearly understood the scope and complexity of what we know as the Affordable Care Act (“ACA”).  During the last two years, we’ve come to learn that lurking within its pages are many taxes and expenses about which most Americans still know very little.

Since March 2010, Congress and the Executive Branch enacted more than 20 changes to the Affordable Care Act.  This series of posts will focus on five items that must still be fixed for the benefit of American citizens and businesses.

Fix #1 – The $2,500 cap on contributions to Medical Flexible Savings Accounts

This is the second of two changes that impact the flexible spending accounts enjoyed by American families since the 1980s.  The first went into effect in 2012 when over the counter medications became ineligible for reimbursement from a Flexible Spending Account. In both cases, the Affordable Care Act takes income that was not subject to tax and makes it taxable.

Beginning in 2013, the Affordable Care Act limits contributions to Medical Flexible Spending Accounts to no more than $2500 per employee.  Currently, Medical Flexible Spending Accounts are not subject to a maximum limit, although many employers have adopted an upper limit, often $5,000.  This has been a blessing to families of children facing the expenses of braces, among many others.   The 2013 limit creates three problems. 

First, the change results in a tax increase for American families who would have contributed more than $2,500.  The amount over $2,500 is now subject to income and employment taxes for the plan participant and the sponsoring employer.  Medical expenses over that limit will be paid with after-tax, instead of pre-tax, dollars.  Many middle-income families will pay about $550 in taxes as a result.

Second, the Affordable Care Act creates an inequity between single people, families with a single income, and dual income families.  In 2013, a family with two wage-earners may set aside up to $5,000 ($2,500 for each employee).  However, a single person or a single-income family may only defer $2,500 into a Healthcare FSA.  This disadvantage to single people and single-income families did not exist prior to the Affordable Care Act.

The following orthodontia example illustrates the concern for individuals and families. 

Under the current rules for FSA’s, a family or single person would have $1,000 remaining to pay for new glasses, contacts, prescription co-payments or other eligible medical expenses.  However, under the new Affordable Care Act rule, only a two income family has remaining funds.  The single person and the single wage-earner family lose out under a federal tax benefit intended to offset the costs of medical care.

Third, the new rule is cumbersome.  In 2012, a family could use single FSA, regardless of the amount.  In 2013, to set aside the two wage-earner family maximum, they must use two plans, two administrators, and potentially two sets of claim requirements.  At year-end when submitting claims for remaining FSA funds, the family may face a mess in submitting claims for partial reimbursement.  If both plans require original receipts, a further mess arises.  In addition, employers have little protection against an increased risk double-dipping as people by submit an expense to both plans.

This change increases federal tax revenue.  It also reduces the value of a benefit people like and use.  Congress needs to fix this Affordable Care Act mess before employees make FSA salary deferral decisions for 2013.

Next in the series:  The Small Business Deductible