The Treasury Department is relaxing the Internal Revenue Services' 29-year-old "use-it-or-lose-it" rule for health flexible spending arrangements, a gesture to businesses from the Obama Administration amid health reform's insurance upheaval.
Employers offering FSA plans will now have two options: letting employees rollover $500, or offering a three month grace period to spend prior-year balances, an option Treasury created in 2005.
"Across the administration, we are always looking for ways to provide added flexibility and commonsense solutions to how people pay for their healthcare," said Treasury Secretary Jacob Lew said in a media statement.
After the Affordable Care Act limited FSAs to $2,500 per employee per year, and with an estimated 14 million American families enrolled in FSA plans, Treasury said it decided to revisit FSA rules to try to make them "accessible to employees of all income levels" and "to minimize incentives for unnecessary spending at the end of the year," one of several criticisms of FSA plans.
"An overwhelming majority of feedback from individuals, employers, and others requested that the use-or-lose rule for health FSAs be modified," the agency said.
Employers, trade groups and benefits companies have long lobbied Treasury to change the FSA use-it-or-lose-it rule.
Before the ACA there was no limit on contributions, but participation was still moderate, with workers turned off by the use-it-lose-it rule, said Bob Natt, executive chairman of Alegeus Technologies, a Massachusetts-based benefits software company.
Of the estimated 85 percent of American workers offered FSAs, about 20 percent to 25 percent participate.
One the leaders of the recent campaign to modify the rule, Natt said the feds have eliminated a "significant barrier to FSA participation: consumers' fear of losing their money."
A former Oxford Health Plans VP, Natt thinks the decision is a sign of the Obama Administration responding to the fact that most Americans with group coverage face some type of moderate or high out-of-pocket medical expenses. "Really nobody has first dollar coverage anymore," he said.
The rollover option could encourage more workers to enroll in FSAs, amid the rise of private insurance exchanges for small and large employers. Treasury also could end up modifying the rule to change the rollover limit, or modify rules for FSA account balances that go unused.
As Natt noted, Treasury created the use-it-or-lose-it rule in 1984 amid concerns about deferred compensation; it wasn't mandated by Congress in the original 1978 legislation creating FSAs.