Starting next year, the Affordable Care Act, commonly referred to as Obamacare, will make some significant changes to the rules of Flexible Spending Accounts (FSA’s).
FSA’s are tax exempt funds that people can use to pay for medical costs not covered by their health insurance plan. Currently, there is no government-imposed limit on how much money can be placed in an FSA. Employers are allowed to put caps on the amount of money allowed in an FSA, but the government cannot.
That’s all about to change.
Starting in 2014, the IRS will impose a $2,500 cap on the amount of money that can be placed in an FSA. For most people, $2,500 will still be plenty of money to cover out-of-pocket expenses. But one group of Americans is likely to be especially affected by change: parents of special-needs children.
Parents of special-needs children often use FSA’s to pay for special-needs education that insurance companies don’t cover. These schools can be expensive. For example, The National Child Research Center, a special-needs pre-school in Washington, D.C., costs up to $26,000 per-year. While parents could pay for that tuition with pre-tax money before, they will soon have to do so with post-tax funds.
“Currently, if parents send their kids to a special school, the tuition is considered a qualified medical expense that can run through your FSA,” says Ryan Ellis, a tax policy director at Americans for Tax Reform. “If you have a kid who needs a durable piece of medical equipment that’s not covered by insurance, you can run that through your FSA. If FSAs had any limits before Obamacare, those were determined by the employer. The IRS had nothing to do with it.”
“Obamacare creates a new $2,500 cap for FSAs,” Ellis continued. “That’s not going to affect most people, who just put in enough to pay for eyeglasses or dental work. But the one group that is being restricted is parents of special-needs children.”
By limiting the pre-tax FSA accounts to $2,500, the government can expect to raise an additional $13 billion in tax revenue over the next ten years.