Fix ‘lose it’ so you can use it

Used by an estimated 35 million Americans, FSAs enable participants to set aside a portion of their income on a pre-tax basis to pay for out-of-pocket medical costs that aren’t covered by insurance. These costs include items like deductibles, co-payments for office visits, prescription drugs, vision and dental care and over-the-counter (OTC) supplies. The accounts are extremely popular since they help participants to budget and control their continually-increasing health costs in a way that addresses their specific needs.

Here’s how the “use it or lose it” rule works: Under current law, the amount an FSA participant chooses to set aside for the year must be spent by the end of the year — otherwise the balance reverts to the employer. This result is problematic.

First, it is nearly impossible for most people to pinpoint what their out-of-pocket health care costs will total in the year ahead. Some people have regular prescription drug and medical expenses, but little else can be predicted — at least not with certainty. Given that, “use it or lose it” often discourages people from taking advantage of FSAs for fear of guessing wrong and losing the remaining balance.

Second, and most importantly, with the advent of health reform implementation, “use it or lose it” no longer serves its original purpose.  The rule was adopted to prevent FSAs from being misused as tax shelters; however, that concern no longer applies. Beginning in 2013, the health care law limits annual FSA contributions to $2,500.  Coupled with the reality that participants contribute their own money to these accounts, the cap prevents any abuse of this popular benefit.

Fortunately, the solution is simple. Instead of “use it or lose it,” Congress should re-craft the rule to allow FSA participants to cash out their unused funds and pay taxes on the remaining balance at the end of the plan year. By establishing the cash-out option, the federal government would have a revenue generating solution to this issue.

In his State of the Union address, President Obama said, “If you have ideas about how to improve [the health care reform] law by making care better or more affordable, I am eager to work with you.” This certainly fits the bill. By advancing the access, affordability, and cost-reduction goals shared by both health care law supporters and opponents, ending the FSA “use it or lose it” rule is one measure that should pass swiftly and without controversy.

Joe Jackson is the CEO of WageWorks, Inc., a leading provider of consumer-directed health account solutions, and chairman of Save Flexible Spending Plans (www.SaveMyFlexPlan.org), a group that works to preserve the use of FSAs.