Change Coming for FSAs? Drop the “Use-it-or-Lose-It” Rule

HT to Meghan McCarthy at National Journal for the report and John Goodman for highlighting it on his blog, but there could be big changes ahead for flexible spending accounts.

FSAs are a tool along with health savings accounts (HSAs) and health reimbursement accounts (HRAs) that can help to engage consumers to be value-seekers in healthcare.

A little-noticed bulletin from the Treasury Department could have a big impact on the roughly 155 million Americans who use flexible spending accounts to cover out-of-pocket health care expenses.

The government’s notice, sent out in May, included a surprise in what otherwise might have been a dry announcement on the implementation of President Obama’s health care reform law. In addition to detailing a new spending cap, the federal government asked for comment on whether it should scrap the “use it or lose it” rules associated with the tax-free health care spending accounts known as FSAs.

As Goodman writes on his blog

There is no reason workers should be forced to spend their Flexible Spending Account (FSA) funds in December on unnecessary purchases like prescription sunglasses rather than forfeit the money. With a tax free rollover, 35 million people would be added to the 27 million or so who already have a “use-it-or-save-it account” (Health Savings Accounts and Health Reimbursement Arrangements). So this could have a huge impact on health care markets.

Two unresolved problems: Would people be able to withdraw unused funds, pay taxes and spend the money non-health consumption? They should. Another restriction that needs to go is the rule that an unused balance in an employer FSA account precludes obtaining a Health Savings Account (HSA) because HSAs cannot coexist with other types of coverage that provide for first-dollar benefits.

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