Armchair Pundits

Ditch “Use It or Lose it”

Many of you out there have probably been doing the same thing that I have been doing recently. And, if you haven’t, you may be doing it soon. I have been completing my annual enrollment for my company’s employee benefits.

As a part of this annual ritual, I am forced to make the dreaded flexible spending account (aka cafeteria plan or 125 plan) election. Making this election requires that you do one of two things. Either you use the mystical powers that you possess to predict the future or you make a lucky guess. How many times will I have to go to the doctor next year? How may times will my wife wrench her back when lifting our son and have to go to the chiropractor? How many times will we send our children to the church nursery or to Sunday school where they will come into contact with another child who is carrying the Q-strain of the Burmese cold virus and how many trips to the doctor will it take to detect and eradicate the virus from my child’s body? The combination of events is both depressing and endless. But each year I am forced to make this election. Under the tax code, you have to make your election prior to beginning of the new year and you cannot change your election unless you have a “change in family status” (i.e., birth of a child, death, or one of a very limited number of specified events).

For those who are unfamiliar with flexible spending accounts (FSA), let me describe them. An FSA is a benefit plan that allows employees to defer a specific dollar amount from their paycheck, up to a maximum of $5,000, in order to pay specific medical expenses. This money is taken out of their paycheck on a pre-tax basis. There is, however, one small catch. If you miscalculate and defer more money than you actually spend during the year, this difference is forfeited. In most cases it is forfeited back to the employer.

This “use-it-or-lose-it” provision has two major drawbacks. First, and most obviously, if you over defer, you lose your money. The second disadvantage of this provision is that in order to avoid forfeiting their money, many employees end up under deferring and, therefore, they pay more for their healthcare.

Correcting this problem, however, falls to the politicians. Every election cycle politicians say that they are going to do something about healthcare costs. They usually come up with grandiose, pie-in-the-sky plans, which are either too complex or too vague for the average individual to understand. And, let’s face it, Congressmen Smith from the 4th congressional district of just-about-any-state-you-care-to-name has about as much chance of pushing their healthcare plan through Congress as I do of winning a gold medal in men’s figure skating at the next winter Olympic games. But, there is something simple that they could do to help ease the burden of rising healthcare costs. Congress needs to ditch the “use-it-or-lose-it” provisions for FSAs and allow for money in FSAs to be rolled over from one year to the next.

Here is how it would work. In year one, I defer a total of $2,500 into my FSA. That same year I have $2,000 in medical expenses. At the end of the first year, instead of forfeiting the $500 that is left in my FSA, it would automatically rollover into my next-year’s FSA. So, in year two, if I defer $2,500 into my FSA, I would be able to pay for $3,000 in medical expenses on a pre-tax basis.

A provision to do just that passed the House this year. Unfortunately, it was tied to one of those dead end bills, such as the 2004 Minimum Wage Increase bill or the 2004 Socialization of Healthcare bill, and died a slow and painful death in the Senate.

Simple solutions are not popular in Washington. There will be no front page headlines announcing the passage of legislation allowing the rollover of FSAs. For once, however, it would be nice if politicians, who constantly claim to be “looking out for the little guy,” step up to the plate and do something that will benefit the average working American.

posted by Squirrel @ 11:02 PM