Treasury May Scrap "Use It or Lose It" Rule on Flexible Spending Accounts

August 15, 2012

A recent bulletin from the Treasury Department asked whether it should scrap the "use it or lose it" rules associated with the tax-free flexible spending accounts (FSAs), says National Journal.

  • FSAs allow workers to set aside pretax dollars from their paychecks to pay for approved health care expenses, such as eyeglasses, braces and doctor visit copays.
  • The Affordable Care Act restricted FSAs from covering over-the-counter drugs unless users have a doctor's prescription.
  • It also capped the total contributions people can make to the accounts at $2,500.

But the new restrictions might result in the end of what is often considered one of the most burdensome restrictions on FSA accounts: employees must spend all of the money they put aside for health purchases before the end of the year or forfeit that balance to their employer.

Known as the "use it or lose it" rule, it is one of the top reasons cited by people who decline the option of setting up FSAs.

  • According to Mercer Health & Benefits, a benefits consulting firm, 85 percent of large employers offer FSAs, but only 22 percent of employees participated in 2011.
  • Nearly half of employees surveyed by Evolution1, a software company that specializes in helping companies administer FSA benefits, lost between $100 and $1,000 over the course of one year.

That rule was originally established to make sure people didn't use the accounts as a way to shield their income from taxes. But a new cap of $2,500 set to take effect in 2013 would prevent people from using the accounts as big tax shelters.

That relief could come in a number of different forms.

  • Bipartisan legislation from would allow employees to collect whatever money is left over in their accounts in the end of the year, up to $500.
  • But Treasury and the IRS could take a number of different approaches, including letting employees roll over funds from one year to the next, or extending a grace period for spending leftover funds into the next calendar year.

Out-of-pocket costs have steadily grown for employees getting insurance from their jobs.

  • According to the Kaiser Family Foundation, 31 percent of people getting insurance from their employers had deductibles of $1,000 or higher, up from just 10 percent in 2006.
  • An FSA could help reduce the cost of covering those deductibles or copays.

Source: Meghan McCarthy, "Treasury May Scrap 'Use It or Lose It' Rule on FSAs," National Journal, August 13, 2012.

 

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