Flexible Spending Account (FSA) Rollover: More Imperative Now Than Ever

In an ongoing effort by the Bush administration to implement a rollover component for Flexible Spending Accounts (FSAs), the FY2003 budget includes $441 million for such a rollover beginning in 2004 and another $23 million for an expansion of options. FSA rollover, as the policy initiative is called, would give health care consumers more options and provide a cost-containment incentive for health care expenditures.

Flexible Spending Accounts allow before-tax spending on health care for non-insurance covered expenses such as deductibles and co-payments, dental and optometrist coverage, mental health services, and prescription drug expenses. FSAs also provide a way for people to buy out of managed care by giving them the ability to spend pretax dollars to see out-of network physicians.

Outlook for 2002
Will 2002 finally be the year when FSA rollovers are enacted? Dr. Merrill Matthews of the Institute for Policy Innovation believes that it just may be. People need to realize they are losing part of their wages in the FSA under current law. “By adding a rollover provision, the FSA is a ‘save it and keep it’ device instead of a ‘use it or lose it’ mechanism. There is reason to be optimistic about 2002.”

Employees can designate a certain amount of their wages to be withheld and placed into the accounts on a pretax basis. They are then reimbursed when eligible medical expenses occur. Under current law, employees lose any amount of money they don’t spend at the end of the year, even though the money deposited in the FSA account comes from the worker’s wages or salary.

The proposal put forth by the president would end the current “use it or lose it” system and allow up to $500 to be carried forward to the next year, tax free.

Many universities and airlines now use FSAs as supplements to the traditional employer-based health insurance system. In the future, FSAs could be structured as viable alternatives to employer provided coverage. The Department of Labor statistics declare 20 million Americans have FSAs.

Other provisions in the Bush plan would give the employee the option to:

  1. Receive the end-of-year balance as taxable income,
  2. Roll over excess funds into a Medical Savings Account (MSA), or
  3. Invest the balance in a 401(k) retirement account.

If cashed out, taxes would be due in the year in which the balance was received. The balance could be rolled over for up to three consecutive years.

The plan is a manifestation of a promise Bush made during the campaign to create FSA rollovers, a concept encouraged by many free-market think tanks and employee organizations for quite some time.

A bill proposed by Representative Edward Royce (R-CA) would increase the rollover allowance to $2,000 per year, but any unspent balance would be subject to taxation each year. The taxed balance could be carried forward for an unlimited number of years, essentially creating a health care spending or retirement account. H.R. 3105 is pending before the House Ways and Means Committee.

Changing the current provisions to allow a rollover will make FSAs more appealing to employees because of the added options. FSA holders will also have an incentive to spend wisely since they can retain the balance at the end of the year.

Creating an FSA rollover is important for another reason. Many employees who have recently lost their jobs and deceased victims of the terrorist attacks had FSAs. Many people in these two groups are having problems meeting the premiums for COBRA coverage or other individual plans. By allowing them to keep the balance in their FSA, they would better be able to meet the costs of premiums and continue their health coverage.

At the very least, current law should be changed to allow portability so that displaced workers are allowed to carry their FSA with them to another job.

In light of the current administration’s proposals regarding greater consumer control over health care decisions, now is a great time to consider the FSA rollover provision. The time seems right to make the Flexible Spending Account truly flexible.


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