Every year at this time, workplace emails, the media, advertising at retailers, and even family and friends remind you to hurry up and spend your health care flexible spending account (FSA) dollars before you lose them.
These are important reminders because no one likes to get caught on the wrong side of the "use it or lose it" rule, which requires consumers who don't spend their entire FSA contribution for the year by the deadline to forfeit the remaining balance to their employer.
This provision, which I've discussed in a few other blog posts, was originally designed to make sure that FSAs wouldn't be improperly used as tax shelters. However, it has created some unintended consequences by encouraging individuals to engage in wasteful health care spending, such as buying extra OTC medicines and supplies or getting a second pair of prescription sunglasses, typically at the end of their plan year or grace period.
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The Affordable Care Act created a new provision banning the purchase of OTC medicines without a prescription that was, in part, intended to correct this wasteful spending (the other reason was likely to raise revenue). However, this adjustment only treats a symptom of "use it or lose it," when a better fix would be to restructure the rule all together.
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 ensures that consumers won't be forced to lose their hard-earned money if their health expenses for the year don't meet 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 from any money not spent on qualified medical purchases.
In case that wasn't enough, I'll leave you with one final reason that the "use it or lose it" provision should be scrapped – its purpose in preventing tax sheltering will no longer be applicable in 2013, when the $2,500 contribution limit kicks in.
For more information on legislation related to flexible spending accounts, please visit www.savemyflexplan.org. In addition, if you have legislative and compliance questions, please email me at [email protected].
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