The health insurance open enrollment period under way at most companies may be one of the last opportunities to fully take advantage of tax-favored accounts for medical expenses.
In pending legislation, employee contributions as soon as 2011 could be limited to $2,500 to flexible spending accounts (FSAs), which employees can use to pay deductibles, co-pays, dental care and more over a 15-month period. Employers currently set their own limits, generally $3,000 to $5,000.
Meanwhile, some legislators have called for annual contribution limits to health savings accounts (HSAs), which workers can use, teamed with high-deductible insurance plans, to sock away money for current and future medical expenses — sort of like a medical individual retirement account.
Next year, the government will allow individuals to contribute $3,050 to their HSAs; $4,050 for those 55 and older; and families can contribute up to $6,150. But a Senate proposal would limit the allowable contributions to the amount of the account holder’s deductible, or roughly $1,150 and $2,300 respectively for individual and family plans.
Contributions to FSAs and HSAs are made with pre-tax dollars so workers, depending on their tax brackets, can save up to around 30 percent on the money they set aside.
Employers save 7.65 percent in Social Security and other payroll taxes. Some legislators want to limit those tax savings to help pay for health care reform.
"If your kid needs braces in the next year or two, you may want to expedite that,” said Joe Jackson, CEO of WageWorks Inc., a San Mateo, Calif. company that administers flex accounts. He’s also chairman of the coalition Save My Tax Plan opposing the FSA caps. "If passed, the caps are a pretty significant tax Americans are going to incur,” he said.