A $6 Billion Employee Benefit May Dry Up

BOSTON ( TheStreet) -- American workers have had to endure millions of job losses, a decade's worth of declines in their retirement plans and higher health-insurance contributions. And now flexible-spending accounts, used by 35 million people in the country, are under threat.

Legislation introduced last month by Sen. Max Baucus (D-Mont.), as part of health-care reform, would place a $2,500 cap on FSA contributions and eliminate the use of the benefit for over-the-counter medications without a doctor's prescription. It would also tax high-deductible insurance plans preferred by many flexible-spending account users.

Eliminating flexible-spending accounts' tax breaks could save $69 billion over 10 years, money that could chisel away 5% of the projected costs of health-care reform. Americans put about $6.1 billion into flexible-spending accounts a year.

Flexible-spending accounts, typically managed as an employee benefit, allow workers to use pre-tax dollars to pay for eligible out-of-pocket health-care expenses such as prescription drug co-payments, vision and dental costs, office visits and medical supplies.

FSAs contain a use-it-or-lose-it clause. Health-savings accounts, which are similar, can be rolled over from year to year, accruing compound interest through investments. The plans can be obtained through an employer as well as qualified banks and insurance companies. Contributions can be made pre-tax, and interest and earnings are tax-free, as are distributions when used for qualified medical expenses. Of the 35 million people in the country with flexible-spending accounts, 8 million have health-savings accounts. More than 85% of large employers offer FSAs, and the average range of contributions is $1,600 to $1,900 a year.

"Many who rely on flexible-spending accounts, including individuals and families battling chronic conditions with high out-of-pocket costs, will lose the full value of the benefit and be forced to pay higher taxes and health-care costs," says Joe Jackson, chairman of the Save Flexible Spending Plans coalition.

"There is always the danger when you are doing something as large as health-care reform of unintended consequences," says Dennis Triplett, chief executive of UMB Bank Healthcare Services and chairman of the Employers Council on Flexible Compensation (ECFC), a non-profit organization that advocates for expanding tax-advantaged employee-benefit programs. "When you are trying to reform a sixth of the economy in one sitting, you may well be doing something that looks appropriate but find out that you have caused angst and pain."

UMB Bank Healthcare Services, a subsidiary of UMB Financial Corp. ( UMBF), provides custodial services for health-savings plans to health-care providers, including Humana ( HUM) and Assurant ( AIZ). It recently surpassed $185 million in HSA assets.

According to the Employers Council on Flexible Compensation, 40% of U.S. adults age 20 to 64 have at least one chronic disease. Those individuals, even when insured, face thousands of dollars a year in out-of-pocket costs. FSA is broken down as follows: doctor visits and hospital deductibles (43%), medicine (26%), dental needs (21%) and vision care (10%).

Triplett is among those demanding that the planned cap on contributions be lifted and, in the future, be indexed to the rate of inflation.

-- Reported by Joe Mont in Boston.