NCPA - National Center for Policy Analysis


December 6, 2004

Throughout the year, an estimated 18 million American workers have pretax dollars deducted from their wages and deposited into their flexible spending accounts (FSAs), which they can use to pay for a variety of health-related expenses. FSAs allow workers to manage a portion of their own health care. For instance, they can choose their own doctors and are not subject to managed care controls. However, at year?s end, any unused dollars are forfeited to the employer sponsoring the plan.

Current federal regulations governing flexible spending accounts (FSAs) force enrollees into a "use it or lose it" position. Both employers and their workers would be better off if these regulations were changed, says Devon Herrick, a senior fellow with the National Center for Policy Analysis.

He recommends the following changes:

  • Allow workers to contribute to the accounts as needed would make them more attractive.
  • Limit employer exposure to the risk of workers consuming thousands in medical costs and leaving prior to making contributions.
  • Allow balances to roll over into other tax-deferred accounts, including Health Savings Accounts, Individual Retirement Accounts, 401(k)s and 403(b)s.
  • Allow employees to access their own money for any medical treatment that would be deductible on itemized income tax returns.
  • Permit workers in firms that do not have FSAs, and the unemployed, to obtain them from third parties such as banks.

FSAs are a great way to save for medical needs. Unfortunately, restrictions on their use and funding make them less popular than they could be. With fewer restrictions, they could become a powerful force for improving our health care system, says Herrick.

Source: Devon Herrick, "Flexible Spending Accounts: Making a good Deal Better," Brief Analysis No. 496, National Center For Policy Analysis, December 6, 2004.

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