Approximately 33 million American workers use pre-tax money from their paychecks to fund flexible spending arrangements (FSAs) that help them manage out-of-pocket medical expenses.
FSAs help American families pay for medical products and services that their insurance plans may not cover. They also benefit patients who choose out-of-network medical providers to best meet their health care needs.
NAIFA supports FSAs and encourages policies that promote their use.
Currently, those who use FSAs are subject to a “use-it-or-lose-it” rule under which they forfeit any money remaining in an FSA at the end of the calendar year (or in some cases after a short grace period).
The Patient Protection and Affordable Care Act places an annual cap on FSA contributions of $2,500 per employee. Ideally, NAIFA would like to see Congress raise or remove this limit on FSA contributions.
But as things currently stand, the $2,500 cap would effectively address concerns that some people could use FSAs to shield excessive amounts of salary from taxes, which was also the purpose of the use-it-or-lose-it rule.
Therefore, NAIFA encourages the Internal Revenue Service to modify its rule to allow employees to carry over up to $2,500 in unused FSA contributions each year. This would in effect extend the use-it-or-lose-it grace period to 12 months, giving FSA participants greater flexibility and helping them to better manage payments for out-of-pocket medical expenses.
The change should be optional for employers. Some plan sponsors may not wish to incur the expense of changing their plan documents, administrative procedures, or employee expectations to make this type of switch.
Other plan sponsors may wish to provide their employees with this added flexibility to compensate for the lower contribution limits. NAIFA members find that our business clients place a high value on flexibility in developing compensation and benefit packages that fit the diversity of their employees.
That’s why NAIFA urges the IRS to support flexibility and strive to minimize administrative costs as it considers changes to the “use-it-or-lose-it” rule.
- NAIFA’s comment letter to the IRS