Treasury Is Asked To Modify Use It Or Lose It Provision On Health FSAs

Washington

Two powerful members of the Republican leadership in Congress have joined with several industry and insurer groups to ask the Treasury Department to modify its “use it or lose it” policy on health flexible savings accounts.

The industry/insurer letter asks the IRS and its parent Treasury Department to propose and finalize a new rule that would permit a limited dollar amount to be carried forward in an FSA each year to be distributed for qualified health expenses only.

The industry/insurer letter says the change would encourage more employees to use health FSAs and further advance the goal of providing employees with more choice and more responsibility in health care decisions. “We believe this action would help employers and their employees respond to rapidly rising health care costs, particularly as it becomes necessary for employees to assume greater responsibility for their health care expenses,” the letter said.

The rule requires that all funds in an FSA be spent in the year in which they are contributed, or the participant loses the balance in the account at year-end.

However, the program is not etched in stone, noted all those involved. For example, the American Benefits Council, joining a number of other insurer and industry groups, said in a letter to Treasury that the rule, which has long been applied, “formally exists only in proposed form.” That implies that Treasury could easily and quickly change the rule without the need for legislation.

“The use it or lose it rule deters many workers from participating in these tax-advantaged vehicles because they fear losing their money if not fully spent,” the ABC said. “The rule also encourages those who do participate to spend their remaining account dollars at the end of each year regardless of whether a health care service is needed.”

Besides the ABC, trade groups voicing support for the change include the Corporate Health Care Coalition, the ERISA Industry Committee, the HR Policy Association, the National Association of Manufacturers, the National Association of Wholesaler-Distributors, the National Business Group on Health and the National Federation of Independent Business. Also joining in were the National Restaurant Association, the National Retail Federation, the National Rural Electric Cooperative Association, Society for Human Resource Management and the U.S. Chamber of Commerce.

The groups said Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee, supports the change, and included a letter written to the agencies by Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee.

In his letter, Grassley said the Bush administration advanced proposals to modify the “use it or lose it” rule in the Treasury Departments

FY2002, FY2003 and FY2004 budget proposals, but nothing had been done.

“I believe that there are strong policy justifications for taking such action,” Grassley wrote. “First and foremost, I am aware of no other area of benefits law in which we allowlet alone mandatethat employee dollars set aside for benefit expenses revert back to the employer.” Grassley added that “the current rule unjustly enriches employers at the expense of hard-working employees who participate in FSAs.”

In addition, the senator said, the “use it or lose it” rule causes inefficient allocation of health care dollars by providing an incentive for employees to incur unnecessary health care expenses at the end of the year to use up the account.

Furthermore, he said, “the use it or lose it rule also has the effect of dramatically reducing employee participation in FSAs because employees do not want to risk forfeiting or wasting their hard-earned money.”


Reproduced from National Underwriter Edition, December 3, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.