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No more Use-it-or-lose-it?

“Use it or lose it” is a provision of the Flexible Spending Account (FSA). The FSA is an account that permits you to use pretax dollars to pay for unreimbursed medical expenses. This can include copays for doctor visits, dental procedures, eye care, and prescribed medicine to name a few. With many employers allowing you to put as much as $5000 into the account over the course of the year, the tax savings can be substantial, $1250 if you are in the 25% bracket. Worth the bit of effort to request the funds be withheld and then fill out the paperwork for reimbursement. But as I started this article, stating that whatever you don’t spend by year end, you lose, many people avoid the FSA for just that reason. Trying to plan this type of spending isn’t easy.

Now, our friends in the Senate (when they are trying to get a bill I like passed, they are ‘friends,’ and I am their fair-weather friend) have introduced the Medical Flexible Spending Account Improvement Act, S. 1404 which would allow plan participants to withdraw their unused money at year end and pay the tax on it.

I like the idea of getting rid of the “lose it” part of the FSA, but the text of this bill leaves me a bit concerned. When an employee leaves, either voluntarily or is fired, and he had spent more from his FSA than he deposited, he is not liable to pay back the difference. My understanding was that the employers weren’t seeing a windfall from leftover money as their were those who spent more than they deposited before leaving. Note, you tell your employer in October/November how much you want to put in during the upcoming year, and are eligible for the entire annual amount as soon as you incur the medical bills regardless of how little you deposited by then.

Unless the bill addresses this feature of reimbursing before collecting, I can see a crazy “unintended consequence” brewing. Employers who decide to lower the FSA limits even lower than the upcoming $2500 limit congress has authorized.

How will this impact you? Do you have access to an FSA, and take advantage of it? Will this bill help you use it more than you did before?

  • Rick July 28, 2011, 7:57 am

    I have a FSA but I rarely use it, precisely because I don’t want to have money left over at the end of the year. If the law was changed in the manner you describe, I would start to use it.

    However, I think FSAs should be done away with, along with many other government subsidies and deductions.

  • JOE July 28, 2011, 8:15 am

    Rick – I have to agree with you. Get rid of the deductions, but adjust the rate structure, and it would be a simpler tax code. I’d look forward to that more than the slight tinkering that mat help me here or there.

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