Sen. Grassley Urges The Treasury To Fix The FSA

Concerned that the "use it or lose it" rule is discouraging many Americans from saving for medical bills in a tax-favored flexible savings account (FSA), Sen. Chuck Grassley of Iowa, chairman of the Senate Finance Committee, has written a letter to Treasury Secretary John Snow, urging his department to redesign the FSA.

"These flexible spending accounts are a good way to help employees meet their health care needs," Grassley said. "Unfortunately, employees have to use the money in their accounts by the end of the year, and they lose the money if they don't. That doesn't make any sense. And it's a deterrent to using flexible spending accounts. I hope the Treasury Department will fix this problem so more Americans will feel comfortable setting up these useful accounts."

Under section 125 of the Internal Revenue Code, employees are currently permitted to contribute at the beginning of the year to an FSA in lieu of other forms of compensation. The pre-tax savings in the account can be used to pay for health expenses that are not covered by insurance. Currently, however, the rule stipulates that the employee loses any funds left in the FSA at the end of the year.

In explaining to Snow why he would like to see this "use it or lose it" rule abolished, Grassley wrote, "I am aware of no other area of benefits law in which we allow—let alone mandate—that employee dollars set aside for benefit expenses revert back to the employer. The current rule unjustly enriches employers at the expense of hard-working employees who participate in FSAs."

In addition, Grassley pointed out, "the 'use it or lose it' rule causes inefficient allocation of health care dollars by providing an incentive for employees to incur unnecessary health care expenses at the end of the year to use up the account. Of course the 'use it or lose it' rule also has the effect of dramatically reducing employee participation in FSAs because employees do not want to risk forfeiting or wasting their hard-earned money."

Grassley recommended that, while legislative remedies to this problem have been proposed, the Treasury Department should examine closely its authority to change the 'use it or lose it' rule. "Modifying this rule," Grassley told Snow, "would help millions of Americans meet their health care expenses and make the FSA rule more rational."