Oct. 30 (Bloomberg) -- About 35 million Americans may have as little as a month to take full advantage of a tax subsidy for out-of-pocket medical expenses under a health-reform bill Congress is debating.

The legislation unveiled in the House yesterday would set for the first time a $2,500 cap on contributions to Flexible Spending Accounts, a benefit offered by employers that allows workers to pay some medical expenses with pretax dollars. Employers currently set their own limits, generally $3,000 to $5,000.

The proposal is similar to one adopted by the Senate Finance Committee. An average worker could lose about $625 in tax savings by failing to take the full amount before the limits are set. The “open enrollment” benefit-selection period now under way at 95 percent of employers may be the last opportunity to claim a higher amount.

“If you’re a parent and your kid needs braces in the next year or two, you may want to expedite that,” said Joe Jackson, chief executive officer of WageWorks Inc., a San Mateo, California, company that administers 1.5 million flexible spending accounts for some 2,800 employers.

The House limits wouldn’t apply until 2013, while the Senate limits would take effect in 2011. The current open- enrollment period, which typically lasts a week or two, is generally the only time workers can decide how much to contribute to their accounts in 2010. About 35 million Americans have flexible spending accounts and they have an average salary of $55,000, said Jackson, who is also chairman of Save Flexible Spending Plans, a coalition of business groups, medical providers and plan administrators opposing the caps.

Growing Popularity

Employers increasingly are offering such accounts, said Beth Umland, director of research for health and benefits at Mercer, a New York-based human resources consulting firm. About 83 percent of employers with 500 or more employees had health spending accounts in their benefit plans in 2008, up from 52 percent in 1995.

The plans let workers deposit money before taxes into accounts that can be used to pay health-related expenses. Typically, all the money must be spent within a year to 15 months or it’s forfeited.

Under current law, depositing $5,000 to pay for a medical procedure such as laser eye surgery would save a worker in the 25 percent income-tax bracket $1,250 in taxes. An employee in the 15 percent tax bracket would save $750. Those tax savings would be cut in half under the proposal to cap the maximum annual contribution at $2,500.

Sam Gibbs, senior vice president for eHealthInsurance, an online seller of insurance based in Mountain View, California, said many Americans are aware of the possible changes.

Closer Look

“For the first time people are taking their benefits package and really looking at them,” Gibbs said. “Now is the time to put as much money in there as possible.”

The House legislation would generate an estimated $13.3 billion in tax revenue to help fund broader health reforms, according to the nonpartisan congressional Joint Committee on Taxation.

The House bill also would place limits on tax-advantaged Health Savings Accounts, which share some similarities with Flexible Spending Accounts, except money in HSAs doesn’t have to be spent by a specific date. It also would prohibit purchases of over-the-counter drugs using Flexible Spending Account contributions.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Margaret Collins in New York at mcollins45@bloomberg.net.

Last Updated: October 30, 2009 00:01 EDT