More flexibility sought for flexible spending accounts

A bipartisan measure would allow workers to roll over or withdraw up to $500 of their unspent FSA contributions.

By Amy Snow Landa, amednews staff. June 24, 2002.

Washington -- Employees who use flexible spending accounts to pay for health care expenses often find at the end of the year that the accounts have one major drawback. Under current law, any money remaining in the account is forfeited.

The AMA has long sought federal legislation that would rescind this "use it or lose it" rule for unspent FSA contributions. The aim of these accounts is to give workers more responsibility for their own health care spending.

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President Bush has also called for lifting the restriction, which has deterred some workers from taking advantage of FSAs.

The tax-free spending accounts are sponsored by employers but funded by employees through salary reductions. Workers use the accounts to pay for medical expenses not covered by their health plan, such as eyeglasses or dental care.

Last year, Bush proposed allowing workers to roll over up to $500 remaining in their FSAs at the end of each year.

Now a bipartisan group of lawmakers hopes to move the initiative through Congress. Reps. Jim DeMint (R, S.C.) and David Phelps (D, Ill.) recently introduced legislation that would allow workers to either roll over up to $500 in their FSAs, withdraw the unspent funds as taxable income, or transfer them to their 401(k) retirement plans.

"To me, this is one of the most critical things we have to do in Washington today," DeMint said at a congressional briefing this month. "It's a simple idea and one that builds on something that already works."

The briefing was sponsored by the Wye River Group on Healthcare, a coalition of business and health care interests that advocates for policy changes to allow employers more flexibility to offer their workers consumer-directed health benefits.

As part of that effort, the Wye River Group has urged the Internal Revenue Service to clarify that workers may roll over unspent money in employer-funded health spending accounts. The IRS is expected to issue its ruling this summer.

On the legislative front, the prospects for the DeMint-Phelps bill remain unclear. "I think we can move this legislation [through the House] this year," DeMint said. But so far, no one in the Senate has stepped forward to sponsor the measure, which would cost an estimated $8 billion over 10 years due to reduced tax revenues.

The legislation has not yet been endorsed by any medical organizations, according to DeMint's spokesperson. At press time, the AMA had not had a chance to review the measure.