FSA News: Use or Lose and the $2,500 Cap

At this time every year human resource professionals, retailers, and even family and friends remind you to hurry up and spend your healthcare Flexible Spending Account (FSA) dollars before you lose them.

These are important reminders! After all, nobody wants to get caught on the wrong side of the “use it or lose it” rule. Under it, any FSA fund balances at year end are forfeited. That’s right; the entire FSA contribution must be spent by the deadline. Any unspent balance is lost to the employer.

This provision was originally designed to ensure that FSAs wouldn’t be improperly used as tax shelters. Nonetheless, it has been met with some unintended consequences because it has inadvertently encouraged individuals to engage in wasteful healthcare spending, typically at the end of their plan year or grace period.

The Affordable Care Act imposed a new provision banning the use of FSA funds to purchase OTC medicines without a prescription. While intended to correct this wasteful spending, this adjustment merely treats a symptom of the “use it or lose it” provision. Meanwhile, many who criticize the provision feel strongly that a better fix would be to restructure the rule altogether.

Bills have been put forth in both the House and the Senate (H.R. 1004 and S. 1404) that would end “use it or lose it” and replace it with the ability to cash-out and pay taxes on any unused FSA funds at the end of the year. This simple compromise would help ensure that consumers don’t lose their fund balance if annual healthcare expenses are below their expectations, that tax-free dollars won’t be spent wastefully at the end of the year, and that the government will be able to access tax revenue on any funds not spent on qualified medical purchases.

Many see at least one more reason why the “use it or lose it” provision should be scrapped:  its purpose in preventing tax sheltering will no longer be applicable in 2013. At that time the federal healthcare reform law will reduce the maximum workers may put into these accounts. 

Right now most employers cap flex accounts at $5,000, even though there is no required limit. But beginning in January 2013, medical FSA contributions will be capped at $2,500 per year, per employee.[1][2]  This change is designed to raise additional tax revenue in order to help pay for 32 million uninsured Americans. The Congressional Budget Office and Joint Committee on Taxation estimate these changes will allow the government to raise about $19 billion between now and 2019.

In every instance, TASC will be pro-Client and pro-Participant! We will continue to work hard to keep our customers at the forefront of our decision-making processes. With that said, TASC interprets the intent of the statutes as such:  Clients who complete their 2013 enrollment by electing their medical FSA contribution level within the 2012 calendar year would not be subject to the pending FSA cap until the following Plan Year. The new $2,500 mandate will therefore apply to any Plan Year starting February 1, 2013 or later. Of course, the effective date for this provision remains 13 months away, so additional federal guidance may yet be forthcoming. Rest assured that TASC will continue to respond and implement the necessary changes and administrative process updates to comply.

[1] Currently, less than 15 percent of all medical FSA participants fund more than $2,500 annually. In fact, the annual amount funded averages between $1,300-$1,400.

[2] For a married couple in which both spouses work, each spouse may fund $2,500 through his/her respective medical FSA (through the respective employer’s Cafeteria Plan); $5,000 total is allowed per couple. 

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