NCPA - National Center for Policy Analysis

Unintended Consequences Of Flexible Spending Accounts

August 31, 1999

Most students of government probably have their own favorite examples of laws which only make bad situations worse. Historic preservation laws, for example, make it too costly to restore buildings, so they remain dilapidated.

Here are the unintended consequences of a tax law aimed at holding down medical costs through establishing flexible spending accounts:

  • Since 1984, this law has allowed employers to offer such accounts to workers.
  • At the beginning of the year, employees declare how much money they want withheld from their pay to cover out-of- pocket medical expenses.
  • Since they don't have to pay federal or state income or payroll taxes on the money, they can save maybe 30 percent to 50 percent on their medical costs.
  • But at the end of the year they must forfeit to their employer all the money in the account that has not been spent.

As a result, account-holders go on medical spending sprees at the end of the year to clean out their accounts -- no doubt also driving up health-care costs in the process. Princeton University health-care economist Uwe E. Reinhardt characterizes this particular law as "venal and stupid."

Source: David E. Rosenbaum, "When Laws Shoot Themselves in the Foot," New York Times, August 29, 1999.


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