Senate Bill Would Amend Tax Rules Regarding Medical FSAs

A bipartisan measure introduced in the Senate last week by Sens. Ben Cardin (D-MD) and Mike Enzi (R-WY) would change the tax treatment of employer-provided medical flexible spending arrangements (FSAs). Specifically, the Medical FSA Improvement Act (S. 1404) would effectively eliminate the “use it or lose it” rule applied to such plans and instead allow employees to pay taxes on and withdraw any remaining funds in their FSAs at the end of the year. FSAs enable participating employees to allocate a portion of their income tax-free to pay for out-of-pocket medical expenses, such as co-payments for doctor visits and prescription drugs, medical supplies, and equipment. According to a press release, at the end of the year the average FSA maintains an unused balance of $100, amounting to nearly $400 million in unused funds per year. Said Cardin: “It’s time we stopped penalizing participants for being efficient in the use of their health care dollars and allow for a sensible cash-out option at the end of each program year. It is both fair and sound health policy.”

A companion bill (H.R. 1004) was introduced in the House of Representatives earlier this year, but has not yet advanced. If enacted, the provisions of either bill would apply to plan years beginning after December 31, 2012.

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