Treasury Dashes Hope For Change On FSA Use It Or Lose It Rule

Washington

The U.S. Treasury Department has dashed the hopes of the employee benefits industry and some powerful members of Congress that it would modify by regulation its “use it or lose it” policy on health flexible spending accounts.

The decision was disclosed through a letter sent to Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, over the Christmas holidays. The letter was signed by Treasury Secretary John Snow, implying it had full Bush administration support.

Snows letter did offer one carrot, although the industry didnt think it was a very appetizing one. Absent legislative action, “Treasury continues to look for creative solutions to the problem,” he said, including allowing a brief administrative grace period in the application of the “use it or lose it” rules consistent with other deferred compensation rules.

But the industry and its supporters in Congress, such as Sen. Grassley, believe the letter might force action through the legislative route in order to provide greater flexibility to employees who want to carry over a limited dollar amount in a flexible spending account to use for qualified health expenses only. That spells “offset,” explained Paul Dennett, vice president for health policy at the American Benefits Council in Washington. By that, he means that any effort to make the rule more flexible and allow employees to carry over money left in FSAs from year to year through legislation would require Congress to take the money from another benefit already provided.

The reason the industry, and both Sen. Grassley and Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee, asked Treasury to change the rule by regulation was because under arcane federal government budgeting rules that approach would have eliminated the need to take the money from another program, Dennett said.

Of equal concern to the industry, Dennett said, is that it believes the primary reason the Treasury rejected an administrative change was policy, not legal restrictions.

“It appears from the letter that Treasury acted out of concern a change in the regulation could interfere with creation of Health Savings Accounts, an administrative priority,” Dennett said. By contrast, he said, ABC believes the opposite. “We think that higher enrollment in FSAs would lead to increased enrollment in HSAs as well because more employees will become familiar with taking greater responsibility and control over their own health care dollars, which is what both HSAs and FSAs have in common.”

Dennett said ABCs information is that more than 80% of employers with over 500 employees offer FSAs, but only 20% of employees participate. “The potential for significant increases in FSA enrollment is certainly there,” he said. “There are only a small number of firms offering HSAs, and greater FSA participation could help pave the way for employees becoming familiar with these new forms of health plans.”

The issue has been brewing since August, when Sen. Grassley asked Treasury to modify the rule to allow greater flexibility in use of FSAs for health benefits. Under rules in effect since 1984, Treasury said, all funds in an FSA must be spent in the year in which they are contributed, or the participant loses the balance in the account at year-end.

The ABC in November joined a number of other insurer and industry groups in asking the Treasury to modify the rule.

Dennett implied that next step for the industry would be to push for a modification of existing law, an approach Sen. Grassley didnt rule out in voicing “disappointment” at the Treasury decision. “Both Sen. Grassley and Rep. Thomas have supported either the modification or elimination of the rule and we will continue to work closely with them to make that change a reality,” Dennett said.


Reproduced from National Underwriter Edition, January 6, 2005. Copyright 2005 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.