Tip of the Month for July 2005

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TIP: Stay Tuned For… Truly Flexible Health Care Benefits
If you’ve been irked by the "use-it-or-lose-it" restrictions that deter employees from making use of flexible health care spending accounts, stay tuned. Moves are afoot to minimize the chance of forfeiture of unused funds - though outright repeal of the forfeit rule seems unlikely. Flexible health spending accounts allow employees to set aside pretax money which they may use for qualified health care expenses that are not covered by their health insurance.

Flexible spending accounts are intended to provide employees with a way to protect themselves from the impact of unexpected medical bills. The forfeiture rule - which requires account holders to use up all their account by the end of the plan year - has been a big deterrent. Most workers are worried by the prospect of miscalculating and actually losing money. As a result, these accounts have not attracted wide-scale support from eligible participants. According to the Congressional Joint Committee on Taxation, there are some 37 million private-sector employees with access to flexible spending accounts, but less than 20 percent actually take advantage of them. Congressional critics of the forfeiture ruling would like to see it repealed entirely. However, others believe a complete repeal would be a tall order, because the ruling was put in place originally to make sure that "cafeteria-style" health plans did not become simply a mechanism to defer compensation. Others note that outright repeal of the forfeiture ruling would make flexible spending accounts more attractive than health savings accounts (HSAs), which currently have the Administration’s full support. HSAs have the advantage of unlimited rollovers, but they require account holders to participate in health plans with high deductibles.

Whatever the eventual outcome, the call for revision is gaining momentum. Here's what has been happening:
  1. A recent change has allowed employers to extend the annual deadline for employees by up to 2½ months.

  2. Senator Grassly, Chairman of the Senate Finance Committee and a vocal opponent of the forfeiture ruling, requested last year that the Treasury Department consider modifying the use-it-or-lose-it rule. Treasury Secretary John Snow has stated that the Treasury does not have the authority to abolish the ruling and that matter would require action from Congress.

  3. Legislation is before the Senate that would allow workers to rollover unused funds (up to $500) from their flexible health care accounts into the next year. The proposed legislation also would offer employees the option of putting unused monies into a health savings account (a new option that would be a hybrid between a flex account and a 401(k)).
Under current rules, employers do not directly benefit from the forfeitures and are required to use forfeited funds to benefit the plan (including offsetting plan expenses). On occasion, the employer can be the loser - if a plan participant quits before his/her annual contributions are in but has already withdrawn his/her total annual benefits in claims. When this happens, an employer has no means to recover the shortfall.

Stay in touch with this issue as the debate on its revision continues. Your professional tax advisor can provide timely updates.


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