FSAs: An end to 'Use it or Lose it'?

And you thought an end to reimbursements for over-the-counter medications through flex spending was big news. Wait ‘til you see what happens if this recently-introduced bill gets passed!

Flex spending accounts (FSAs) have undergone a lot of changes since the passage of last spring’s Patient Protection and Affordable Care Act:

• As of Jan. 1, 2011, your company can no longer reimburse employees for over the counter medications without a prescription via their FSAs.
• Starting Jan. 1, 2013, the maximum contributions employees can make to an FSA gets capped at $2,500 per year.

But get ready for another significant change … and one that could cause a whole lot of headaches for Finance!

The change has nothing to do with the healthcare reform law. Instead, a new bill just introduced in Congress would eliminate the “Use it or Lose it” policy that is probably the biggest downside to FSAs.

Employees could withdraw and pay tax on the balance

The Medical Flexible Spending Account Improvement Act (H.R. 1004) would allow employees to withdraw and pay taxes on the remaining balance of their flex spending accounts, rather than forfeit the remaining money. Note: They wouldn’t be able to roll it over into their accounts for following year.

Sure, that would be good news for you personally – no more struggling to determine the exact right amount to sock away at the beginning of each year.

But it’s enough to send chills down any payroll person’s spine.

The new law would saddle Finance with the task of cashing out those FSAs out and taxing the balances at the end of the year … the time when no Finance department has a second to spare already!

Not only that, but there are larger, more strategic consequences for companies. Those “lost” dollars have historically helped employers foot the bill for administering the FSAs in the first place. So they’ll have to find those dollars somewhere else.

Still, proponents argue that eliminating Use it or Lose it would dramatically boost participation in flex spending accounts. And as healthcare costs just keep on rising, anything that can make things more manageable for people is worth it.

So will Use or Lose it bite the dust?

The bill was introduced a few weeks ago. Stay tuned – we’ll update you on any and all developments.