Although generally a highly rated and highly valued benefit, one of the most irksome realities of flexible spending accounts is that account holders must drain the funds at the end of every plan year or lose them altogether. However, a bipartisan Senate proposal aims to end the FSA “use it or lose it” rule.
Well, I guess the gridlocked way the debt ceiling talks are going, something ought to be bipartisan. Sheesh.
Late last week, Senators Ben Cardin (D-Md.) and Mike Enzi (R-Wyo.) introduced a bill that would allow consumers to pay taxes on and withdraw any remaining FSA funds. The bill has support in the House as well, introduced with bipartisan support this spring by Reps. Charles Boustany (R-La.) and John Larson (D-Conn.).
“It is time to modernize FSAs to eliminate this burdensome ‘use it or lose it’ rule,” Cardin said when he introduced the legislation. “It is both fair and sound health policy to allow FSA participates to cash-out remaining funds at the end of the plan year rather than forfeiting the balance to their employer.”
Amen, I say.
“FSAs help millions of Americans manage and reduce their out-of-pocket health care costs,” said Joe Jackson, chairman of Save Flexible Spending Plans and CEO of benefits administration service provider WageWorks, Inc. “However, the ‘use it or lose it’ rule creates an unnecessary risk for FSA participants and a deterrent for non-participants. Changing this rule will ensure that participants don’t lose their hard-earned money if their out-of-pocket health care costs don’t match their prediction for the year.”
I repeat: Amen!
Cardin adds that since health care reform caps annual FSA contributions at $2,500 beginning in 2013, “the ‘use it or lose it’ rule [is] unnecessary.”
Ame- … Hey, now wait a minute. Not sure I agree with Cardin on that one, and know at least one benefits professional who doesn’t either.
In an either/or scenario, which FSA reality would you choose? Keeping “use it or lose it” and being able to set the cap as you see fit? Or, keeping the cap and letting account holders rollover funds from year-to-year? Share your thoughts in the comments.
Already Registered?
If you have already registered to Employee Benefit Views, please use the form below to login. When completed you will immediately be directed to post a comment.
Not Registered?
You must be registered to post a comment. Click here to register.
13 Comment(s)
Posted by: Jan L | August 2, 2011 1:51 PM
I really have to laugh at people calling other people idiots and then saying things like - return the cap to $5,000 or $5,500 as it was before.
There is no IRS cap on unreimbursed medical expenses that may be paid through a cafeteria plan. The employer sets the limit in their plan douument. Yes, it should be non-discriminatory, but you will not find anything within or outside of IRC Section 125 stating a limit on the medical portion of a cafeteria plan.
Report this Comment
Posted by: Diego | July 30, 2011 11:15 AM
As many have previously pointed out below, the -use-it-or-lose-it rule goes hand-in-hand with the employee's ability to use his or her entire yearly amount prior to putting the money in (and then having a net win if he or she departs the employer before year-end). If you eliminate the first rule, you absolutely have to change the 2nd, which should not be that big a deal, because an employee can just wait until further along in the year to request reimbursement. If you don't also eliminate this second rule, employers would really take a beating on their FSA plans (which they still probably are net losers on today anyway with both rules in effect).
As to over-the-counter medicines, frankly it was not that long ago when such medicines were not permitted under FSA plans. Then the rules were changed to allow coverage (so instead of running out at the end of the year to buy contacts and glasses folks could stock up on over-the-counters to hit their limit at year-end). Problem with over-the-counters now is basic underlying tax rule: Once you give taxpayers something, it is darn tough taking it away
Report this Comment
Posted by: dirtysox | July 27, 2011 5:19 PM
Lots of moving parts here ("current" law is no dollar cap ($5,000 cap is only for 129 DCAPs), what about the optional reimbursement grace period that softens UIOLI, the unfunded reimbursement requirement mentioned in other comments, etc) . . . but it sounds like this Senate proposal is for a cash-out at the end of the year and not rollover. If true, then the FSA reality choice in the last paragraph is off because it presents: (1) UIOLI with no $ cap or (2) rollover of excess with $2,500 cap.
I will answer that I prefer the second because it is similar to an employer administered HSA account (and an employee funded HRA account too), but the prospect of not getting forfeited unused reimbursements under either a cash-out or rollover design would be pretty unpopular with employers if they could still get burned by early overreimbursement of terminating employees.
Report this Comment
Posted by: Stacey K | July 27, 2011 12:21 PM
What about the tax ramifications to employers since previously pre-taxed monies may now become taxed?
Report this Comment
Posted by: Ken M | July 26, 2011 3:31 PM
It a partial solution but is a start in the right direction. The limit must be raised back to $5,000 and put over the counter drugs back in the mix. However, this is wishful thinking and highly unlikely. Washington is looking for tax revenues to feed the spending monster.
Report this Comment
Posted by: Erin P | July 26, 2011 2:51 PM
As usual Congress is making proposals without thinking through the entire plan and the ramifactions that will come of their changes. If you're going to let them roll the unused dollars or take a tax penalty on them that's great, but employer's pay money to offer the program and float the dollars during the year while they wait for the employee to pay in their contribution. HCSA's will need to have the same DCSA rule where you can only use what you've paid in for this to be an effective solution that doesn't alienate employers and prevent them from offering the benefit. The other possible solution of requiring the employee to repay overused dollas isn't a good fix either because you can't predict what the final check and deductions will come to.
Report this Comment
Posted by: Erin W | July 26, 2011 2:48 PM
Just goes to show you once again Larson is out of his league and is completely stupid when it comes to health care. Instead of being able to rollover FSA money, he should be restoring the cuts made to this program so that over the counter drugs can once again be purchased and the cap of $2500.00 that goes into place in 2013 be lifted and changed back to the $5500.00 previously allowed. To allow employees to roll-over this money will not encourage more participation...is he going to force these same employees to pay back monies over spent when they leave a company. Larson would be wise to stick to something he actually knows something about and health care is not it.
Report this Comment
Posted by: Heather R | July 26, 2011 2:31 PM
The lose it dollars also can pay for the TPA fees incurred so that's an added expense. However, if more employees use this or increase their elections that will offset the taxable income, which helps as well.
Report this Comment
Posted by: snap | July 26, 2011 2:14 PM
The FSA carry over option or the taxable cash refund would encourage more employees to take advantage of the benefit without the risk of losing their unused funds. Also, employers may resist continuing to offer FSA plans when there are no "lose it" dollars to offset employees terminating before year-end after exhausting their FSA funds.
However, the $2500 limit is rather low when considering the continuing rise in health care cost and high deductible plans.
Report this Comment
Posted by: Elizabeth H | July 26, 2011 2:10 PM
I agree with Veronica, especially since funds can be held by HSAs. @ Benefits Geek, hopefully the tax savings make up for it, but if an employee couldn't take money ahead of time that would also cut enrollment.
Report this Comment
Posted by: BenefitsGeek | July 26, 2011 2:06 PM
This is a half-baked solution. Right now an employee can claim up to their annual limit before they have contributed the max. If the same employee leaves the company mid-year after receiving reimbursement for their full annual election, the employer has incurred an unexpected expense. The employee benefits because they received more out of the FSA plan they what they paid into the FSAplan.
They need to restrict the amount one can claim to the amount contributed. With this provision in place removing the "use it or lose it" makes sense. Without it, the employer's liability increases. I would not support this as it is currently proposed
Report this Comment
Posted by: judyf | July 26, 2011 1:56 PM
and why would an employer offer such a plan? If an employee uses all funds deposited + those not yet taken from payroll and quits the employer, where does that leave the employer? Holding the bag. This proposal needs to be more thought out.
Report this Comment
Posted by: Veronica F | July 26, 2011 1:46 PM
About time this issue was addressed. A lot of employees fail to utilize this benefit due to the fear of not being able to estimate thier annual medical expenses. A carryover provision is long overdue.
Report this Comment
Add Your Comments...