Flexible spending accounts - Use or lose, why?

The flexible health care spending accounts offered by corporate benefit plans are ‘use or lose’. Meaning, if you don’t spend all the money in the account, you lose it. Why is that?

I realize that the money that goes into the account is pretax, but why can’t they just take it out at the end of the year, take the tax out at that time, and give you the difference?

Because, technically, you’re supposed to pay taxes quarterly.

The IRS is nice enough to allow you to have taxes taken from your paychecks and sent to them ahead of time, and you only need to reconcile once a year. But, if it turns out that your deductions weren’t enough to cover a certain % of your total tax burden, the IRS will levy a penalty for not paying your taxes appropriately in each quarter.

If you don’t have deductions made, you are supposed to pay each quarter, although, for most people, this can be an estimated amount which you then reconcile on April 15 like everyone else.

If you were allowed to leave $5000 in a tax haven all year, then get it all back, minus taxes, the IRS would have been shorted money you owed earlier in the year.

That’s not really a great explanation, but it beats my HR office’s stance of “because it is a benefit to you, so you must only take advantage of it in the way it was intended”

Good news! Well, kind of. Supposedly (no cite, sorry) next year, off-the-shelf medication will be covered. Have $5,000 left in your flexible spending account? No problem; procure yourself a lifetime supply of cough syrup. :slight_smile: Heck, they sell beer at the CVC pharmacy, and the receipts aren’t that hard to modify…

Our plan started allowing over-the-counter meds effective 10/1. 'Course that didn’t help me this year, because I didn’t enroll, but it’s more incentive for next year.

My wife told me the other day that the IRS will modify this in the near future, allowing you to roll over excess funds into your next year’s account.

I think the reason they were set up as use-it-or-lose-it is that the gummint is losing revenue by allowing these accounts, and they wanted a limit on how much they would lose.

I don’t know about that, CurtC. The government has in fact gotten stricter with other forms of FSAs, such as the Section 132 Transportation Fringe Benefit Plan. These used to allow rollovers under Section 132 from year to year and that was stopped last year or so. I just attended a seminar on FSAs and I don’t recall hearing anything about the law changing to allow rollovers. Obviously though I could well have been asleep during that portion.

In any case, one reason they don’t allow rollovers is because an FSA is able to be used - the entire amount you have elected - on day 1. For example, if you elect for Jan. 1-Dec. 31, 2004, to have $50.00 per month deducted pre-tax for your FSA, that means at the end of the year you will have $600. Well, you can choose to use that ENTIRE $600 on Jan. 2, if you want, assuming you have legitimate expenses, and if you quit your job on Jan. 3, there’s nothing the company can do about getting that money back. They cannot withhold it from your pay. They cannot make you write them a check. It’s tough luck for them. Not allowing endless rollovers is one way of offsetting that disadvantage to employers.

I have a similar account (a Medical Savings Account or MSA) that does roll over AND earns interest. The difference is that I am self-employed. Little bennie there to offset some of my tax DISadvantages.