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.

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