“The proposed Medical Flexible Spending Account Improvement Act (H.R. 1004), a bill that would allow employees to withdraw and pay taxes on any remaining funds in their medical flexible spending accounts (FSAs) instead of forcing them to forfeit the remaining balance to their employer, as current rules require, was introduced on March 11, 2011, by Reps. Charles Boustany, R-La., and John Larson, D-Conn.
FSAs are pretax accounts funded by employee contributions that can be used to pay for qualified medical expenses. The IRS adopted the forfeiture, or “use it or lose it,” provision to prevent FSAs from being misused as tax shelters. However, a $2,500 cap on FSA contributions set to begin in 2013 as required by the Patient Protection and Affordable Care Act eliminates the need for that concern, according to Save Flexible Spending Plans, an advocacy campaign that works to promote the accessibility and use of FSAs.
The proposed bill does not allow unused FSA funds to be rolled over and remain in the employee’s account for the following year. In this regard, FSAs would remain distinct from health savings accounts (HSAs), in which funds may roll over and grow through compounding from year to year. HSAs, however, must be linked to high-deductible health plans, whereas FSAs carry no such requirement.
An ‘Easy Fix’
“As the price of health care continues to climb, FSAs help millions of working Americans manage and hold down their out-of-pocket costs,” said Joe Jackson, CEO of benefits provider WageWorks Inc. “Unfortunately, the ‘use it or lose it’ rule creates an unnecessary risk for FSA participants and a deterrent for non-participants. A change to this 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.”
He added, “In considering changes to improve our health care system, removing ‘use it or lose it’ is an easy fix.”
Boustany and Larson echoed that sentiment in a letter to their colleagues in Congress. “Over 85 percent of large employers offer FSAs, but only 20-22 percent of eligible employees enroll,” stated the representatives. “The principal reason for not enrolling, or for underfunding accounts, is fear of the ‘use-or-lose’ provision.”
One-quarter of participants forfeit some of their FSA funds every year, the bill’s sponsors noted.
“Now is the time to finally eliminate the use-or-lose provision,” Larson added in a statement. “It is truly unfair that families must forfeit hard-earned dollars that they have reserved for health expenses if they remain in the account at the end of the year.”
Some employers responded to the bill’s introduction by noting there is a business case to be made for forfeiture of unused funds. Forfeited funds, they argue, are used by employers to offset the cost of administering the FSA.
In addition, the “uniform coverage” rule requires that employers make the full amount of coverage elected under the plan available to employees from the first day of the plan year, regardless of how much an employee has actually contributed to the account through salary deferral. When employees elect the full amount, submit and receive reimbursement up to the annual limit and then leave employment mid-year, the employer is liable for the expenses in excess of the employee’s partial-year contribution. Forfeited funds help offset this cost, which can be substantial, some point out.”