Let’s End Flexible Spending Accounts

I have never been a believer in the value of flexible spending accounts. The Baucus Bill calls for setting a $2,500 annual limit on what people can set aside in an FSA, among other restrictions.

Ron Leiber reports that “a not-quite grass-roots effort has sprung up, led by companies that administer flexible spending accounts,” to advocate for them.

I’ve fought with one of those companies, SHPS, and still carry the raw animosity for it. With that I quote only Leiber’s discussion of why this is not worth fighting for:

You take money out of your paycheck once to finance the account. Then you reach into your wallet for the health care expenses themselves, effectively fronting the money for a second time. Finally, you gather all your receipts and send them in for reimbursement. While there are now debit cards that allow you to pay for expenses directly from the spending account, not every practitioner accepts them. And the card companies often demand receipts anyway to prove you bought aspirin and not candy at the drugstore.

This isn’t the real reason the accounts are in senators’ sights, though. One factor is this: If you don’t use the money in your account within a year (or during the two-and-a-half-month extension that the government also allows), you lose it and your company keeps it. This inevitably leads to the annual goofball ritual of people running around town buying glasses or loading up on contact lens solution before the deadline.

And that’s if you’re lucky. Uwe E. Reinhardt, an economics professor at Princeton who is not a fan of the accounts, wrote a post earlier this year on the Economix blog at NYTimes.com noting that his wife once scheduled year-end, his-and-her colonoscopies to spend their funds.

Drugstore.com even has a flexible spending account mini-store on its site, so that no one should be confused about what they can spend their money on. All of these spending sprees with leftover funds may well encourage more health care spending than is necessary.

Detractors also complain that wealthy people benefit the most from the accounts. After all, the more you earn, the higher your income tax rates. And the higher your income tax rates, the more you stand to save by putting pretax money in the accounts. And people who earn more usually have an easier time setting aside money in the first place.

The few arguments he musters for them are weak. But apparently Olympia Snowe wants the limit we can set aside for them increased.