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Home Publications Blogs Beat the Press A Really Really Stupid Health Care Tax Break Doesn't Cover Breast Pumps

A Really Really Stupid Health Care Tax Break Doesn't Cover Breast Pumps

Wednesday, 27 October 2010 04:40

The NYT devoted a major article to tell readers that flexible health spending accounts, the stupidest tax break anyone has ever been able to design, do not cover breast pumps. This is kind of like devoting an article to the fact that the rapidly growing Flat Earth Society holds meetings on the Jewish holidays.

Of course the real story would be the fact that a nutball organization is rapidly growing and the real story here is that an incredibly poorly designed tax break is continuing in this era of health care reform. Flexible spending accounts are wasteful from almost any perspective.

First the cost of administering the credit for companies is almost as large as the amount of the savings. Many organizations pay close to $100 per worker to administer the accounts. If a person puts $1000 a year into the account and is in the 15 percent bracket, like most workers, the tax savings are $150. If a worker puts the maximum $2,500 in an account and is in the 25 percent bracket, then the savings are $625. In this case, the administrative costs are still more than 15 percent of the tax savings.

This of course does not count the time spent by beneficiaries dealing with their accounts. There is often considerable paper work associated with these accounts. Often companies refuse to make payments, requiring participants to spend hours going back and forth with clerical workers in order to get reimbursements. 

Flexible spending accounts also have an absurd use it or lose it provision. Extra money in an account at the end of the year is lost to the participant. This causes many participants to stock up on items like prescription glasses or over the counter medicines in order to avoid losing their money. Much of this spending is wasteful, since these are items that are not really needed.

Finally the credit is very regressive, since the largest benefits go the highest income individuals. It also is small business unfriendly since the administrative costs make it uneconomical for many small businesses. This puts small businesses at a disadvantage in trying to attract workers who might care about this benefit.

It is remarkable that such an incredibly poorly designed tax credit survived health care reform. (This is probably explained by the fact that most of the people who worked on designing the bill benefit from it.) It leads to more economic distortions that most of the forms of protectionism that get major news attention and cause columnists and editorial writers to hyperventilate (e.g. the "buy America" provision in the stimulus). The continued existence of these accounts merit attention, since it is a major scandal.


[Addendum: Several comments correctly point out that contributions to FSAs are also exempted from payroll taxes. This would add another 15.35 percent to the tax savings. So a person in the 15 percent bracket who puts $1,000 into an account would be saving herself and her employer a combined total of 30.35 percent of this amount or $303.50.]

Comments (10)Add Comment
I agree about health FSAs
written by Mike B., October 27, 2010 6:23
They give you a benefit for predictable health care costs but not unpredictable ones. Last year, I used up my FSA in the first 6 months, but this year I still have 2/3rds left, so I'm going to have to spend it somehow. Never again (although I hear they're going to issue prepaid credit cards next year to make administration easier).
written by izzatzo, October 27, 2010 6:58
From the NYT article, this quote:
As of Jan. 1, however, over-the-counter medications — including allergy remedies, cough suppressants or even pain relievers like aspirin or ibuprofen — will be eligible only if they are prescribed by a doctor.

That's nice. Where aspirin and ibuprofen are usually available for less than two cents each, in order to get a tax break the cost of a doctor visit raises the price by only several thousand percent.

It's part of the Hippocratic Oath taken by all doctors. First and foremost, do no harm to their economic rent.
written by liberal, October 27, 2010 7:55
izzatzo wrote,
It's part of the Hippocratic Oath taken by all doctors. First and foremost, do no harm to their economic rent.

Where do the excess funds go?
written by Hospital Administrator, October 27, 2010 8:03
I too have never been a fan of the HSA for all the reasons stated by Dean. One thing that is not clear to me is who keeps the excess money if you do not spend down your account each year? Is it the company administering the plan? Seems like the fairer thing to do (other than eliminating them altogether) would be to refund the end of year balance to the account holder. This unspent money should then revert back as taxable income. Or, just role the unspent amount into the next year. The use it or lose it approach always stuck me as outright theft.
written by Balta1701, October 27, 2010 8:34
Dr. Baker...I find this post very intriguing, but I think it hangs very much on the claim that FSA accounts cost about $100 per employee to oversee, and I'm concerned by the fact that there is no citation given to that data. Is it possible to provide a citation that gives a more complete description of how that number was calculated?
Reply to Hospital Administrator
written by Mike B., October 27, 2010 11:53
I think unused amounts go to the employer. Like you, I wish they would allow unused money to roll over, which they do with the Health Savings Accounts (available only with high-deductible plans). For my plan, at least they there's a grace period, until March 15 of next year.

By the way, I don't think you pay Social Security/Medicare taxes on FSAs, so the savings are larger than Dean's calculations.
written by SKG, October 27, 2010 1:14
The employer and (generally) the employee also gets the 7.65% FICA tax eliminated. This represents $76.50 on a $1000 contribution, and I suspect mostly pays for the administrative costs.

Effectively, what the employee is doing is purchasing a 1 year Health Insurance Plan, using pre-tax dollars, for $1000, that pays a maximum of $1000. Like any insurance, if you don't happen to use it, the "insurer" gets the money.

An interesting twist is that if you leave your job, you can potentially have collected the full amount, but paid "premiums" only a fraction of the year. (Some plans limit monthly payouts, however.)

You can also use COBRA and continue to pay your premium with after-tax dollars. Presumably you'd do so if you had any large pending medical expenses.
written by boxer, November 03, 2010 6:20
To profit from healthcare is immoral and should be criminal. But capitalism IS evil.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.