Health FSA rollover.

[Guest Brenda N.]

Is anyone aware of a current bill in Congress that may allow up to $500 rollover in a Health FSA? Do you happen to know the bill number? Thanks.

[papogi]

Bush's $500 carryover was in a budget proposal. I know of a $2000 carryover measure currently being tossed around. It is HR-3105, and you can see it at the URL below:

http://www.benefits.net/ecfcnews/hr3105.pdf

[Guest Brenda N.]

Thank-you.

[papogi]

I have some opinions about the carryover concept, and I wasn't sure your reasons for the original post, so I figured I would offer them up in hopes of drawing out any other opinions.

I have real reservations about the carryover idea. I understand its primary aims, and they are well intentioned: Tempering the "use-it-or-lose-it" rule should allow for (1) increased participation by employees, and (2) reduced flurry of wasteful claims at the end of the year simply to clear out the account. I see some problems that it will cause, however. First, lessening the risk that the employee has in the agreement with the employer will cause some employers to abandon the FSA completely. From my years of administering FSA's, I can see that there are almost always experience gains. An employer overall pays almost nothing to offer an FSA benefit, and often gets something out of it. Allowing money to be transferred to the next year, or allowing terminated employees to spend down their carryover amounts or take the carryover amount as cash substantially reduces the employer's risk. Perhaps enough to cease offering the benefit, thereby reducing nationwide FSA participation. Administratively, it will be a bit of a nightmare, particularly for employers who process flex in-house. Keeping track of separate carryover amounts versus current year amounts will increase administrative costs, and from a practical standpoint, could cause errors in participants' accounts. In the case of health care accounts, the $2000 limit doesn't help shift much risk back to the employee, since most employers have a health care limit of $2500 or less. When Bush's $500 carryover idea came out awhile ago, I looked at the forfeiture history of 25 of my FSA clients. Under the current regs, they all had experience gains in the time period I examined. Applying the potential $500 regs, 7 of the clients had their forfeitures effectively drop to zero, and the rest had them drop substantially. A $2000 reg would have even more impact. I know that experience gains are not the reason that employers should implement FSA's, but without them, employers will fear losses from terminating employees who clear out their accounts enough that they might not offer the benefit. I can visualize many ways for an employee to abuse this potential new ruling, too many ways to list them here. From a pure fairness standpoint, it seems that this eliminates so much of the employee's risk in an FSA, that the required risk-shifting characteristic would be in jeopardy. Frankly, I'm amazed this idea has gotten as far as it has.

[Guest Matt J]

Actually, even if FSA rollover is passed, it's really up to each employer as to whether they will allow it and to what extent. The law will only set limits on the FSA accounts.

Also, with the availability of the FSA rollover, some employers will feel that the increase in FICA savings is still a good incentive or that it will allow them to increase plan deductibles, leading to a lot more savings than the FSA forfeitures ever would.

As a side note, the latest word on HR 3105 is that it is not getting bi-partisan support, so this may end up being moot.

[papogi]

If it ever does pass, my guess is that most employers would eventually adopt the new rules and use them to their fullest in order to stay competitive with the employer next door (how many employers use a DCFSA limit lower than $5000 anymore?).

Good point concerning FICA savings. That may well remain a big enough reason to continue to offer FSA's, even with this new disadvantage thrown at the employer.

I agree with you that this will probably be a moot point. I remember HR-1764 back in 1997, and that one went nowhere. While it was more sweeping than the current HR-3105, I think the new incarnation will probably end up in the dustbin, as well.