A mostly overlooked bulletin sent out in May from the Treasury Department, included a surprise in what otherwise might have been a routine announcement on further implementation of the Patient Protection and Affordable care Act.
For years, as part of our general belief in consumerism in health care decision making, SBAM and other in the business community have encouraged FSAs, HRAs and HSAs based on the view that having subscribers take on more out-of-pocket expenses would increase competitive pressures and bring down health care costs. However, in the Affordable Care Act things went the opposite direction. To help cover the cost of the law, the Affordable Care Act restricted FSAs from covering over-the-counter drugs unless users have a doctor’s prescription. It also capped the total contributions people can make to a FSA at $2,500.
But the new restrictions also might end the hated “use it or lose it” provision. In the May notice, the Treasury Department asked for comment on whether the “use it or lose it” rules associated flexible spending accounts should be overhauled. We think they should and as a result, along with our third party administrator Kushner & Co. comments have been written and forwarded to the IRS regarding our thoughts on this rule.
In summary here is what we think: “The “use it or lose it” rule is counterproductive to all parties (the participant, the plan sponsor, and even the Treasury). It requires participants who have not utilized all of their plan contributions into their FSA to do a year-end dance of finding eligible items on which to spend the amounts that would otherwise be forfeitable. We even now see providers directly appealing to FSA participants to spend their soon-to-be-unused dollars with them (e.g. two or three pairs of prescription sunglasses, contact lenses, and additional prescription drugs, among many others). This goes against any public policy or plan sponsor attempt to try to link health care spending with better consumerism. In fact, it is anti-consumerism, sending a message to participants to go spend money indiscriminately before you lose it. If Treasury were to repeal the “use it or lose it” rule (which does not exist in the statute), at year-end (or after any allowable grace period or runoff period) participants could be given a choice to either take taxable cash or make a tax-deferred contribution to the plan sponsor’s 401(k), 403(b), or 457(b) plan. This would not violate the rule against deferred compensation in a §125 plan and in fact would result in greater FICA/Medicare/income tax revenue to the Treasury for those participants electing cash and greater payroll tax revenues for those electing the retirement plan option. A cash option is statutorily required since all three Code sections (401(k), 403(b), and 457(b)) require a cash-or-deferred election.”
We will keep you informed as this issue weaves its way through the IRS. To read the entire comments, click here.