FSA Use-It-or-Lose-It Bill

The House of Representatives passed the Health Care Cost Reduction Act of 2012 (H.R. 436) by a 270-146 vote.  The bill proposes to:

• Repeal the 2.3% tax on medical devices
• Allow individuals to once again use HSAs or health FSAs to pay for their qualified over-the-counter drugs
• Adjust the health FSA “use-it-or-lose-it” rule and allow participants to receive a taxable cash distribution of unused funds up to $500 annually
• Allow the IRS to recapture overpayments of any extra PPACA health insurance purchase tax credits

The last bullet point, which would require taxpayers to return 100% of any extra tax credits, is getting attention.  The health care reform bill (PPACA) called for the IRS to pay the credit to eligible taxpayers in advance.  This was in hopes that those taxpayers can then use that cash to pay for their health insurance.

Opponents of this bill state that even taxpayers who do their best to obey the law will still get extra credit payments because their income increases during the year or they become newly eligible for group health coverage.  Some argue this will keep some taxpayers from getting the assistance they need and increase the number of uninsured persons in the country.

The Senate has yet to vote and President Obama has threatened to veto if it reaches his desk.

The full bill can be found here.

IRS Provides Guidance on $2,500 Health FSA Limit

A provision of the Patient Protection and Affordable Care Act scheduled to take effect on January 1, 2013, limits Flexible Spending Account contributions to $2,500 per tax year. Late Wednesday, the IRS issued Notice 2012-40, which provides transition relief to non-calendar-year FSA plans by clearly establishing that the requirement does not apply for plan years that begin before 2013 and that the term “taxable year” in the law refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made.

Federal legislation was introduced by Representative Erik Paulson and Senator Kay Bailey Hutchison (H.R. 5923/S. 3673) last year to repeal this cap.

The IRS also announced that the Obama Administration is considering whether the “use or lose” rule for health FSAs should be modified in light of the $2,500 limit.  The guidance states, “The $2,500 limit, while not addressing the ‘use or lose’ rule, limits the potential for using health FSAs to defer compensation and the extent to which salary reduction amounts may accumulate over time. Given the $2,500 limit, the Treasury Department and the IRS are considering whether the use-or-lose rule for health FSAs should be modified to provide a different form of administrative relief (instead of, or in addition to, the current 2½ month grace period rule).” The administration is requesting comments on the issue to be submitted by August 17.