Health Savings Accounts Undermine Push to Allow Flexible Spending Account Rollovers

It looks like efforts by the Senate Finance Committee to change the “use-it-or-lose-it” rule governing flexible spending accounts may be stalled indefinitely because of competition from health spending accounts. HSAs, which the Bush administration introduced in 2004 and is energetically promoting, allow employees in high-deductible health plans to put aside pretax money to cover deductibles of several thousand dollars; whatever is not used by the end of the calendar year can be rolled over.

If the FSA use-it-or-lose-it rule is eliminated, HSAs could lose much of their allure, says Andy Anderson, an attorney who specializes in health spending accounts at Hewitt Associates. He may be right: Treasury Secretary John Snow estimates that the number of HSAs would be reduced by 10 percent if the rule were changed.

FSA flexibility arose as an issue in August, when Senate Finance Committee Chairman Charles Grassley, R-Iowa, wrote a letter to Snow asking if use-it-or-lose-it could be modified. Snow answered that Treasury didn’t have the authority to do it. He explained that the rule is in place to fulfill a congressional mandate that cafeteria plans not become vehicles for deferred compensation. A Senate Finance Committee aide said Snow’s argument is not compelling and blamed opposition on a lack of political will.

Anderson also says the squabble between Snow and Grassley “is not worth getting excited about.”

“The IRS now allows FSA money to be used for over-the-counter drugs, so there’s a far greater universe of things you can spend that money on,” he says. “And a lot of FSA administrators offer debit cards for spending down the account, so you don’t have to pay upfront and then submit a reimbursement form.”

When employers do a good job of communicating the benefits of an FSA or make it easy to use–as with debit cards–utilization goes up, he says.

Whether FSAs are easier to use or not, the Bush administration has shown a reluctance to change the rules for their use, policy-makers in Washington say. As for the estimate of a 10 percent reduction in the number of HSAs, Grassley aides are skeptical, saying there is no data to support it.

Lawmakers have tried to change the rule many times before, most recently in Medicare legislation passed in December 2003 that included a provision to allow a $500 rollover of FSA money to the following year. It failed, and that same bill created the HSA.

Right now, two very different groups are participating in HSAs, says Jon Kessler, chairman of WageWorks in San Mateo, California, an independent administrator of spending accounts in the United States. At one end of the spectrum are wealthy, self-employed people. At the other are people buying their own health insurance.

“The latter group doesn’t have the money to put into an HSA, so the primary beneficiaries are wealthy, self-employed people like small-business owners, doctors and lawyers,” Kessler says. “That is a solidly Republican constituency” that has little interest in making FSAs more flexible.

—Eilene Zimmerman