House Panel OKs Bill to Ease FSA ‘Use-It-or-Lose-It’ Rule

The bill approved by the House panel would eliminate over-the-counter restrictions in the health care reform law.

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.

Business groups have their misgivings about the measure. A better approach from a health policy perspective would be to allow employees to roll over unused funds to pay for succeeding years’ health care expenses, said Steve Wojcik, vice president-public policy for the National Business Group on Health in Washington.

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.

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.

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.

Generally, tax-free withdrawals from HSAs are only allowed to pay for uncovered health care expenses.

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

Jerry Geisel writes for Business Insurance, a sister publication of Workforce Management. To comment, email editors@workforce.com.

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