How We Got Here: A timeline of tax-free health care


1978 – Tax reform creates flexible spending accounts (FSAs)

The Revenue Act of 1978 was a major piece of tax reform that also created the flexible spending account (FSA) as one of its key features. FSAs were created to combat some of the common issues of the HRA, namely that employers would reap the majority of the tax benefits, and employees were not able to contribute, which was a major problem if they had more advanced health issues to cover.

FSAs were created to put power back in the hands of consumers, who could make more efficient use of pre-tax health care dollars to match their unique needs. These accounts were designed to function on a year-to-year basis, and were subject to a "use-it-or-lose-it" rule. This meant that money set aside through regular payroll deductions must be used by the end of each plan year or the remainder would be forfeited to one's employer (enter: the major incentive to employers to cover the cost of an FSA program).

FSAs were the first accounts to put buying power directly in the hands of account holders, as they could choose how much to contribute each year to cover medical expenses and save on their taxes, as well as choosing what products and services to spend it on.

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