FSAs: Not so Flexible Anymore

August 24, 2010

Effective as early as next year, the IRS will begin to limit the advantages of the Flexible Spending Account (FSA) on two fronts.  First, a cap of $2,500 will be imposed for 2013 and later FSA contributions which will reduce the pre-tax savings for those who had previously contributed higher amounts.   Second,  over- the- counter (OTC) drugs and medications will no longer be eligible for reimbursement in 2011 unless accompanied by a doctor’s prescription or letter of medical necessity.  So items such as cough syrup, acne cream, pain relievers, diaper rash ointment, and other common OTC medications now need a doctor’s stamp of approval. 

This will impact employees that in the past have accessed their FSA funds by using a debit card, since now they will need to pay out of pocket and submit a reimbursement request form along with the proof of medical necessity.   Now employees will probably have to pay the extra cost of visiting their doctor to get the prescription to purchase the OTC medicine, which really defeats the purpose of being able to buy these medicines over-the-counter in the first place.

Ironically, these new restrictions were put into law when President Obama signed the Patient Protection and Affordable Care Act in March of 2010 which has now made some OTC drugs unaffordable if FSA funds can’t be used.  It is critical that employees are made aware of these new changes during this fall’s open enrollment period, so that they do not overfund their FSAs with the expectation of being able to stock up on aspirin and acne medicine.