Healthcare is a difficult topic in the United States. We face doctor shortages, medication shortages, and long wait times for specialty referrals, not to mention difficulties paying for treatment. In a system like ours that focuses on reactive treatment of acute problems rather than proactive or preventive treatment, patients will always struggle. Even some of the systems in place to make healthcare work better don’t function the way they should. The health flexible spending account (FSA) is one of those systems, and the problems will surprise you—they certainly surprised me. Even as a person with nearly 10 years in the workforce with ample access to plans like FSAs, I didn’t understand the real costs.
In an FSA program, employees can put aside pre-tax dollars to spend on health-related costs like physician co-pays, medication, first aid supplies, and other medical expenditures. The program is designed to slightly defray the cost of healthcare borne by individuals. With lower costs, the government hopes, Americans with these plans will spend more money on their health and help build a healthier population. One big problem with FSAs is that the money is use it or lose it, meaning that employees generally will not be able to access their funds after the last day of their plan year (some employers choose to allow employees to roll over up to $610 for use in the next year, or to allow a grace period of up to 2 ½ months for spending the funds, although they are not required to). This restriction results in FSA holders losing potentially hundreds of dollars each year, and in 2020 that’s exactly what happened: an estimated 48 percent of FSA holders forfeited money and lost an average of $408, which amounted to an estimated $4.2 billion loss overall. This would make a huge difference in the average worker’s spending power!
You might be asking, Where does this money go? The money does not go back to the government or return to the employee to be taxed. Instead, the money goes back to the employers. Employees are essentially subsidizing their employers by forfeiting their FSA contributions. When I learned this, I was shocked. I work hard for my money, and I don’t want my salary going back to my employer. That means I need to be sure I spend all my FSA contributions. However, there is difficulty here too: like many Americans, it can be hard to estimate my health-related costs each year. I can assume that I will have a few yearly appointments and small spends on things like Band-Aids and cold medicine, but I never truly know how much money I will need. And even then, there’s only so much I can spend on things like medication that might expire before I need it. FSA holders need more options so the program can do what it was designed to do: help Americans be more proactive about their health.
The fact that the Internal Revenue Service (IRS) has lagged behind digital health developments and failed to cover tools that truly help people take proactive preventive measures makes is harder to put their own money toward their health. As we have argued in the past, one way of ensuring people can actually use their FSA dollars on things that work and help improve their health is to clarify that wearable devices and software used to prevent or treat health conditions are eligible. Our hard-earned FSA dollars shouldn’t go to waste for lack of useful options. Congress has the opportunity to help American workers improve their health and put $4.2 billion back in their pockets by clarifying that they can use their FSA funds on wearables and digital health apps.