The Bush administration has declined to try to use regulatory authority to ease current restrictions on use of flexible spending account assets.[@@]

Today, employers must take unused FSA assets back at the end of the tax year, even though employees have funded the accounts with contributions from their own earnings.

The employee benefits industry has argued that the U.S. Treasury Department has the authority to modify the current “use it or lose it” rules without going to Congress to seek changes in the laws that govern FSAs.

But Treasury Secretary John Snow rejected that argument in a letter sent to Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, in late December.

Treasury does not believe it has the authority to let FSA holders keep unused assets in the accounts after the end of the year, Snow writes.

But “Treasury continues to look for creative solutions to the problem,” Snow writes.

Snow says Treasury might be able to establish a brief administrative grace period that would delay application of the use-it-or-lose-it rule.

Treasury already includes grace periods in the regulations that implement other deferred compensation program laws, Snow writes.

But Grassley, who expressed disappointment about the letter, and benefits industry executives say the letter might force the industry to go to Congress for help with changing the use-it-or-lose-it rule.

The problem with going to Congress for relief is that Congress would face pressure to replace any tax revenue lost as a result of the change by tightening another tax provision or cutting spending on another program, according to Paul Dennett, vice president for health policy at the American Benefits Council, Washington.

But the benefits industry still could appeal to Congress for help.

“Both Sen. Grassley and [Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee], 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 says.

Dennett says he 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 [that] a change in the regulation could interfere with creation of health savings accounts, an administration priority,” Dennett says.