Congressmen Charles Boustany (R-La.) and John Larson (D-Conn.) have introduced a bill that would allow consumers more time to withdraw and pay taxes on their medical flexible spending accounts instead of forfeiting the remaining balance to their employer at the end of each year, as current rules require.
The Medical Flexible Spending Account Improvement Act aims to encourage more people to use FSAs if available at their workplace, while providing relief to the estimated one-quarter of FSA holders who forfeit funds every year.
"Over 85 percent of large employers offer FSAs but only 20 (percent to) 22 percent of eligible employees enroll," said Boustany and Larson in a letter to Congress promoting the bill. "The principal reason for not enrolling or for underfunding accounts is fear of the 'use-or-lose' provision."
FSAs were introduced in the late 1970s as a method to allow workers to place money in a pre-tax account that could be used to pay for qualified medical expenses during a company's health insurance plan year. Under current law, employees in qualified plans determine at the beginning of the plan year how much money they want to place into the account. Any amount not used by the end of the plan year is forfeited.
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The forfeiture portion of the law – the "use it or lose it" provision – was added as protection against people using an FSA for tax advantage. But provisions in the Affordable Care Act, which put a cap on annual FSA contributions of $2,500 beginning in 2013, have made that concern moot.
"As the price of healthcare continues to climb, FSAs help millions of working Americans manage and hold down their out-of-pocket costs," said Joe Jackson, chairman of Save Flexible Spending Plans and CEO of benefits provider WageWorks. "Unfortunately the 'use it or lose it' rule creates an unnecessary risk for FSA participants and a deterrent for non-participants. 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 healthcare expenses."
Under the proposal now before Congress, any funds not used to pay for medical expenses during the plan year can be withdrawn by the account holder, who would then pay tax on the amount withdrawn.
"In considering changes to improve our healthcare system, removing 'use it or lose it' is an easy fix," said Jackson. "We hope members of Congress will move quickly to join Reps. Boustany and Larson in their effort to make FSAs even more accessible and consumer-friendly."