new-fsa-bill.jpgLawmakers are considering a bill that would give employees with health care Flexible Spending Accounts (FSA) the option to cash out unused balances at the end of the year and report those amounts as taxable income.

The Medical Flexible Spending Account Improvement Act of 2011, introduced recently by Reps. Charles Boustany (R-LA), John Larson (D-CT), Erik Paulsen (R-MN) and others, aims to encourage more people to use health care FSAs by eliminating the so-called “use-it-or-lose-it” rule.

Currently, health care FSA account holders are required to forfeit any unspent funds in their account at the end of each year. The bill does not affect dependent care FSAs, which have no “use-it-or-lose-it” provision. Read more.

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New FSA Bill Would Repeal ‘Use-It-Or-Lose-It’ Rule

Fri Mar 18, 2011

new-fsa-bill.jpgLawmakers are considering a bill that would give employees with health care Flexible Spending Accounts (FSA) the option to cash out unused balances at the end of the year and report those amounts as taxable income.

The Medical Flexible Spending Account Improvement Act of 2011, introduced recently by Reps. Charles Boustany (R-LA), John Larson (D-CT), Erik Paulsen (R-MN) and others, aims to encourage more people to use health care FSAs by eliminating the so-called “use-it-or-lose-it” rule.

Currently, health care FSA account holders are required to forfeit any unspent funds in their account at the end of each year. The bill does not affect dependent care FSAs, which have no “use-it-or-lose-it” provision.

“Americans want healthcare solutions that lower costs,” said Boustany, who is a retired surgeon. He went on to say that “these accounts should not penalize individuals who save for medical expenses. We should eliminate the provision and empower consumers to make prudent healthcare decisions.”

Co-sponsor Larson said “now is the time to finally eliminate the provision.”

Working with the Employers Council on Flexible Compensation and other associations, Ceridian has for many years advocated modification of the health care FSA “use-it-or-lose-it” rule, urging Congress to enact either an annual “carry-forward” or a “cash-out” alternative. The health care reform bill President Obama signed into law last year imposes a $2,500 annual cap on the maximum amount employees can elect for their FSAs. The cap would be effective starting in 2013.

Over 80% of large companies in the United States offer FSAs, but actual participation rates among employees have only been around 20%, which is lower than was expected when FSAs were introduced in the 1970s. The consensus Ceridian hears from clients is that the “use-it-or-lose-it” rule discourages FSA participation because families worry they will have to give up their hard-earned money at the end of the year.

The outlook for the Boustany-Larson bill is uncertain. Much will depend on the budget impact “score” estimated by the Congressional Budget Office and the Joint Committee on Taxation. It’s hoped that the legislation could actually raise revenue for the Treasury since unspent FSA funds would become taxable income.

With out-of-pocket medical expenses like deductibles and co-pays expected to continue rising sharply, health FSAs are an important employee health benefit that can help families save for medical costs on a pre-tax basis. Eliminating the “use-it-or-lose-it” rule, some lawmakers feel, definitely falls in line with the spirit of health care reform — giving consumers more freedom to manage their own health care and its costs, with fewer penalties.