Flexible Spending Accounts: Clarifying all the Recent Buzz and Legislation

Recently there has been quite a bit of buzz out of Washington regarding Flexible Spending Accounts (FSA). Two different things have recently taken place: 




#1 - The Internal Revenue Service on Wednesday provided regulatory relief for health care flexible spending account participants and also said it is reconsidering its longtime use-it-or-lose-it rule for FSAs.



Under that relief, the IRS said participants in noncalendar-year plans can still make the maximum contributions to their FSAs during the first year that a mandated FSA contribution cutback goes into effect under the health care reform law.


The issue involves a provision in the Patient Protection and Affordable Care Act, which goes into effect on Jan. 1, 2013. Under that provision, the maximum annual contribution employees can make to their FSAs will be $2,500. Under current law, there is no annual limit, though employers typically limit annual contributions to $4,000 to $5,000


To read a full article about this guidance click here

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# 2 The House Ways and Means Committtee voted on three separate changes to the FSA/HSA legislation that will be explained below. The key things to remember regarding these items is that they haven't yet been heard by the whole House, so they have not been voted into law as of this post.



Use-it-or-lose-it


A decades-old Internal Revenue Service rule that requires forfeiture of unused flexible spending account balances would be eased, and health care reform law-imposed restrictions on using FSAs and health savings accounts to pay for over-the-counter medications would be eliminated, under separate bills approved Thursday by a panel of the U.S. House of Representatives.


Under the Medical FSA Improvement Act of 2011, H.R. 1004, cleared by the House Ways and Means Committee on a 23-6 vote, employers could amend their FSAs to allow employees to withdraw as taxable cash up to $500 in unused balances remaining at the end of the plan year or at the end of an FSA grace period, if an employer has that feature.


The distribution would have to be made no later than seven months after the close of the plan year.
The committee action coincides with an IRS announcement this week that it will consider modifying the 1984 use-it-or-lose-it rule that requires forfeitures of unused FSA balances at the end of a plan year or grace period.


Over-the-counter medications


The other bill—the Restoring Access to Medication Act, H.R. 5842—which the committee approved on a 24-9 vote, would overturn an unpopular provision in the health care reform law that restricts the use of flexible spending accounts and health savings accounts to reimburse employees for OTC medications.
Under that provision, FSA reimbursement is permitted only if the employee obtains a prescription for the medication, while in the case of HSAs, OTC reimbursement is permitted without a prescription but a 20% federal tax is imposed on the distribution.


The bill approved by the House panel would eliminate those OTC restrictions in the health care reform law.

Retiree HSA distributions


A third bill, H.R. 5858, approved by a 21-7 margin, would allow retired employees who are at least age 55 but not yet eligible for Medicare to withdraw funds tax-free from their health savings accounts to pay premiums in early retiree health care plans offered by their former employers.


The three bills are expected to be considered by the full House next week.