Benefit professionals have tirelessly lobbied for an end to the so-called use-it-or-lose it rule governing pretax employee contributions to a flexible spending account, which is now the centerpiece of a bipartisan proposal in Congress.
But some industry observers are underwhelmed by the “Medical Flexible Spending Account Improvement Act” (H.R. 1004) co-sponsored by U.S. Reps. Charles Boustany (R-La.) and John Larson (D-Conn.).
Under the proposed legislation, FSA participants would be allowed to withdraw and pay taxes on any remaining account balances rather than forfeit those funds to their employer.
Currently, the Code Section 125 regulations allow employers to use forfeited contributions to pay plan administrative expenses and offset costs incurred by employees who spend their FSA funds and then terminate employment.
Paul Dennett, senior vice president of health care reform for the American Benefits Council, would prefer that Congress “allow unused FSA dollars to simply remain in an individual’s FSA to meet future health care needs, or perhaps rolled over into an HSA when that option is available, too.
Either way, the funds could continue to be available for the purpose they were intended to serve and both employees and employers could be spared the need to pay taxes on excess FSA contributions.”
Ceridian Corp. in Minneapolis, Minn., a leader in FSA administration services, has long advocated an annual carry-forward option or cash-out alternative to the use-it-or-lose it rule. Mary Jo Davis, the company’s vice president of product management, says many employer clients reported over the years that the rule discouraged participation in such programs.
“As out-of-pocket medical expenses like deductibles and co-pays continue to rise,” she explains, “health care FSAs are an important employee benefit that can help families save.”
Impact of health care reform
But perhaps the tide is now turning in a post-health care reform environment that seeks to leverage the health care consumerism movement’s full potential. Ernie Harris, Ceridian’s senior product manager for consumer-directed health care solutions, describes the use-it-or-lose-it rule as “a missed opportunity for FSA participants to better manage their health or the health of their families.
Eliminating it falls more in line with the spirit of health reform, which is to further empower individuals to share responsibility for their own health care and its costs.”
The rule was designed to prevent FSAs from being turned into tax shelters during a time when that concern was top of mind at the federal level, but in 2013 the Patient Protection and Affordable Care Act will slice in half the $5,000 maximum FSA contribution that each employee is now allowed to make. FSA proponents argue that the impending change will eliminate such concerns.
While H.R. 1004 has drawn its share of criticism, the proposal was recently praised by Save Flexible Spending Plans, a national grassroots advocacy campaign sponsored by the Employers Council on Flexible Compensation.
“As the price of health care continues to climb, FSAs help millions of working Americans manage and hold down their out-of-pocket costs,” according to Joe Jackson, the group’s chairman and CEO of WageWorks, Inc., which describes itself as the nation’s largest independent provider of consumer-directed benefits solutions.
Jackson says a change to the use-it-or-lose-it rule “ensures that individuals will not be forced to use up or forfeit any remaining funds simply because their families’ needs did not match their predicted annual health care expenses.”
Reps. Boustany and Larson recently noted in a letter that more than “85% of large employers offer FSAs, but only 20% to 22 % of eligible employees enroll. The principal reason for not enrolling, or for underfunding accounts is fear of the use-or-lose provision.” They also lamented that one quarter of participants forfeit some of their FSA funds each year.
— Shutan is a freelance writer based in Los Angeles.
