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Employee Benefits Legal Blog Employee Benefits Related to Labor & Employment Matters

Will “Use-it-or-lose-it” Go Away? Maybe.

Posted in Plan Administration, Welfare Plans

I start this entry by saying "THIS IS NOT LAW SO NOTHING HAS CHANGED."  Consider this a news item only.  But it should be of interest to anyone with a flexible spending account and should be placed on your radar to see what develops.

A bill has been introduced in the House of Representatives that would repeal the “use it or lose it” aspect of medical flexible spending accounts  (FSA).  Representatives Charles W. Boustany (R- Louisiana) and John Larson (D-Connecticut) have introduced the bill that would allow participants to cash out any remaining FSA balances at the end of the year, and those funds would be treated as normal, taxable wages.  It would not be carried over, but it could at least be cashed out and the balance would not be forfeited.   

This provision is presumably designed to prevent participants from losing the money that otherwise would be forfeited and it does correctly treat the return of the balance as taxable income.  However, it also overlooks the fact that forfeited account balances are often used to defray administrative expenses incurred by the plan and often offsets amounts paid to participants who withdraw more than they have put into the plan through deferrals when they terminate before the end of the plan year.  So while there is nothing that has to be done immediately, plan sponsors should put this on their radar to see if administrative changes should be made.

We will continue to track the bill for future developments.