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On Flex Spending Accounts: A Hidden Tax Increase on Employees



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Andrew’s post highlights one of the many tax increases hidden in Obamacare. Prior to the Act, there was no statutory limit on the amount an employee could set aside to pay for out-of-pocket medical expenses on a pre-tax basis. Many employers limited the amount to $5,000 or so (since it’s use or lose). By capping the pre-tax set aside at $2,500, the Act subjects to income taxes those wages above the $2,500 threshold that an employee might have set aside previously. So for a family with taxable income of $100,000, this provision alone could lead to a tax bill as much as $625 higher than before the Act, if they were maxing out on their Flex Spending account. Because these are voluntary set asides, the hike isn’t going to affect everyone, but it surely will have an impact on the bottom line of a number of less-than-millionaires, even by the Democratic definition (meaning earning $250k).

UPDATE: An email illustrating the problem:

My wife and I have four children, all teenagers, and for the past few years have maxed out our contribution to our FSA account. We are under the 250K income limits our President promised not to impose new taxes on and we will feel the impact of this change.  With our oldest entering college in another year the extra $625 would have come in handy, but I guess we’ll just make do.  I actually think more impact for this “change I can believe in” will flow from decreased spending on discretionary medical items. As an example, three years ago I had Lasik eye surgery and paid the lion’s share out of our FSA account; were that account not available to me I would still be wearing glasses.

I’m sure the economic impact of several thousand people making a decision of this type in the future will have a negative ripple effect on the economy. The commercial landlord who owned the building where my surgery took place loses out; the guy doing the landscaping loses out; the people cleaning the clinic lose out; the power company loses out; the advertising agency loses out; the radio station that was running the ads loses out, etc. etc. etc., all because someone who has never created a job has a better understanding of the world than I do.



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