Human Capital & Careers

FSAs: No More ”Use It or Lose It”?

Flexible spending accounts have been criticized for their rigidity, but concerns for government tax revenues might slow any changes.
Stephen TaubJanuary 6, 2005

Between 12 million and 18 million workers currently have flexible spending accounts (FSAs), according to The Wall Street Journal, which cited Bonnie B. Whyte, president of the Employers Council on Flexible Compensation.

FSAs allow participants to pay their medical bills with pretax dollars — but at the end of each year, participants forfeit any unspent money in their accounts. Critics say that the risk of forfeiting money has discouraged many individuals from participating in FSAs; those who do participate, add critics, frequently contribute far less than they eventually spend.

A better-known result of the “use it or lose it” rule is the year-end ritual in which FSA participants go on shopping sprees and buy goods and services that they otherwise wouldn’t, simply to avoid leaving money in their accounts. To address this rigidity, Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, asked Treasury Secretary John Snow to modify the rule.

In a letter to Grassley reviewed by the Journal, however, Snow reportedly contended that the Treasury Department doesn’t have “sufficient legal authority” to change the rule administratively, although Treasury officials are searching for “creative solutions.”

Grassley told the Journal that he is “glad” Treasury officials are looking to improve the rule but “disappointed that the department seems reluctant to make changes.” That rule “doesn’t pass the common-sense test, and it’s hurt taxpayers for more than 20 years.” Added the senator: “I also don’t understand the argument that the Treasury Department and the IRS don’t have the power to change the rule. If they wrote it, surely they have the power to change it.” (Last May, in fact, the House of Representatives approved a bill that would allow employees to carry over up to $500 of unspent money from year to year.)

Another consideration for the government might be lost tax revenue. According to the Journal, tax analysts have estimated that relaxing the rule would likely encourage many more employees to participate in FSAs; over the next decade, billions of pre-tax dollars might then find their way into flexible spending accounts rather than into government tax coffers.

About one-quarter of companies with 10 or more employees offered a health-care FSA in 2004, up from 23 percent the prior year, according to the Journal, which cited Beth Umland, director of research at Mercer Human Resource Consulting. The number of participating employees at those organizations held steady at 36 percent. Among companies with 500 or more employees, 81 percent offered a health-care FSA in 2004, with an average of 20 percent of eligible employees participating.

The average contribution was $1,295 last year, up from $1,136 a year earlier. There is no legal cap for contributions, but many employers typically set it at around $3,000 to $5,000 per employee, according to the Journal, citing Umland.