Lawmakers have introduced a bill, H.R. 1004, that could let workers withdraw and pay taxes on any funds remaining in flexible spending accounts (FSA) at the end of the year.
The arrival of H.R. 1004, the Medical Flexible Spending Account Improvement Act bill, represents the start of a new round in the long effort to eliminate the requirement that FSA holders spend all account assets at the end of the year or forfeit the assets.
Employees fund FSAs with pre-tax contributions. The Internal Revenue Service adopted the end-of-the-year forfeiture provision to keep FSAs from being used as tax shelters, according to Save Flexible Spending Plans, Washington, a coalition that is fighting for an end to the rule.
The rule is no longer necessary, because a provision in the Patient Protection and Affordable Care Act (PPACA) will cap annual FSA contributions at $2,500, the coalition says.
The lead sponsors of the latest use-it-or-lose-it repeal bill are Reps. Charles Boustany, R-La., and John Larson, D-Conn. They note in a letter urging colleagues to support the bill that about 85% of large employers offer FSAs but fewer than 25% of eligible employees enroll, partly because concerns about the use-it-or-lose-it rule. Each year, about 25% of FSA enrollees forfeit some FSA assets.
Joe Jackson, chairman of Save Flexible Spending Plans, says FSAs have helped U.S. residents manage out-of-pocket costs.
“Unfortunately the ‘use it or lose it’ rule creates an unnecessary risk for FSA participants and a deterrent for non-participants,” Jackson says in a statement. “A change to this rule ensures that individuals will not be forced to use up or forfeit any remaining funds simply because their families’ needs did not match their predicted annual health care expenses.”
FSAs and use-it-or-lose-it repeal efforts have broad, bipartisan support, but some tax policy specialists say the FSA program is expensive and does little to help the people who need the most assistance with getting and paying for health care.