Federal Issue Brief

 Medical FSA Improvement Act of 2011, H.R. 1004

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AVMA Position:

Support

Summary:

H.R. 1004, a bipartisan bill sponsored by Rep. Charles Boustany (R-LA-7) and Rep. John Larson (D-CT-1) would:

  • Remove the "use it or lose it" provision requiring flexible spending account (FSA) participants to spend their entire contribution before their plan's deadline or forfeit the remaining funds to their employer;
  • Replace the requirement to forfeit unused funds with the ability to cash-out remaining funds and pay any applicable taxes on the amount withdrawn.
  • Eliminate the requirement that FSA participants obtain a doctor's prescription in order to use their accounts to pay for OTC medications, such as allergy medicine and cough syrup. This rule is a burden for consumers and physicians, since additional office visits are required to get an OTC medication prescription.

Background:

  • FSAs are a mechanism for workers to set aside pre-tax dollars from their salary to spend on qualifying medical expenses.
  • The IRS adopted an end-of-the-year forfeiture provision to keep FSAs from being used as tax shelters. The "use-it-or-lose-it" rule translates into about 25% of participants forfeiting some FSA money each year (about $85 per forfeiture).
  • Currently employers determine the limits on FSA contributions, although a provision in the Patient Protection and Affordable Care Act (PPACA) caps annual FSA contributions at $2,500 beginning in 2013, with adjustments for inflation thereafter.
  • An FSA impacts taxable income -- if an employee earns $50,000/year and contributes $4,000 to an FSA for health-care expenses, they reduce their taxable income to $46,000. At a 25% marginal tax rate, that will save $1,000 in income taxes.
  • As of 2010, about 33 million U.S. workers, or 20%, used FSAs, according to Hewitt Associate

Justification:

AVMA has established a record of support for legislation to allow up to $500 of unused money in FSAs to be permanently carried over to subsequent plan years (HR 544, 111th Congress) and a bill that would allow an exclusion from the gross income of an employee of up to $7,500 ($10K for employees with one or more dependents) for employer contributions to a flexible spending arrangement (S. 988, 111th Congress).

Current Status:

Referred to Ways and Means Committee

AVMA Contact:

Gina Luke, Assistant Director, Governmental Relations Division, 202-289-3204