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January 10, 2005
For Now, No Change to Make Benefit More Flexible

The Treasury Department says it lacks the legal authority to change the use-it-or-lose-it rule for flexible spending accounts (FSAs), a rule that some say is an obstacle keeping employees from using them, the Wall Street Journal reports.

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FSAs allow employees to pay for medical bills with pretax dollars. At the beginning of the plan year, employees choose an amount to be withheld from wages during the course of the year and deposited into a separate account. Under rules for FSAs, at the end of the year, employees forfeit any unused amounts.

Senator Chuck Grassley, chair of the Committee on Finance, had asked the Treasury Department to review its rules for FSAs and amend them so employees could carry forward unused amounts for use in subsequent years.

In a response to Grassley's request, Secretary of the Treasury John Snow said that without congressional action, the department has no legal authority to change the use-it-or-lose-it rule.

Grassley disagrees with Snow's assessment.

"[The] rule doesn't pass the common sense test, and it's hurt taxpayers for more than 20 years," said Grassley in a written statement. "I also don't understand the argument that the Treasury Department and the IRS don't have the power to change the rule. If they wrote it, surely they have the power to change it."

Snow also suggested that eliminating or changing the rule would hurt some of the Bush administration's other priorities, such as health savings accounts (HSAs). HSAs give tax-favored treatment for current medical expenses and allow workers to use unused amounts in one year in subsequent years. However, rules for HSAs require that the worker be enrolled in a high-deductible health plan in order to participate. The Bush administration contends that this high-deductible-plan requirement will help reduce overall healthcare spending.

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