Washington, DC – U.S. Senators Ben Cardin (D-MD) and Mike Enzi (R-WY), both members of the Senate Finance Committee, have introduced legislation that keeps a worker’s unspent funds from a flexible spending account in their own pocket. The Medical FSA Improvement Act of 2013 (S. 966) would amend the Internal Revenue Code to allow employees who use health flexible spending arrangements (FSAs) to cash out any remaining balance in their account at the end of a plan year.  This provision replaces current Internal Revenue Service (IRS) policy in which any unspent FSA funds revert to the employer at the end of the plan year for activities related to the administration of the plan. 

“In an economy where every penny counts, it makes little sense for employees who miscalculate their anticipated yearly out-of-pocket health care expenditures at the beginning of a plan year to have to forfeit those funds to their employer at the end of the year, if unspent,” said Senator Cardin. “Millions of private industry workers, as well as federal, state, county and local public sector employees put their money into FSAs to help defray their out-of-pocket health care costs, saving money for them and their families. We should remove any fear these workers have of losing their hard-earned money while encouraging them to use these funds wisely.”

“Medical flexible spending accounts help put families and consumers in control of their medical decisions,” said Senator Enzi. “With the high cost of health care, we should be doing whatever we can to encourage people to be proactive and plan ahead, like putting money into a FSA for out-of-pocket costs. Our legislation will ensure that hard-working Americans don’t lose the money they put aside simply because their health costs were less than they anticipated. It’s time to end use-it-or-lose it for flexible spending accounts.”

FSAs are an important benefit for all workers.  They allow employees to set aside pre-tax dollars to pay for out-of-pocket health care expenditures, including dental and vision services.  Many families count on their FSAs to help pay for their monthly expenditures for prescription drugs, co-pays for doctor’s visits, their children’s dental care, and medical equipment and supplies for disabled family members. 

Saying that it “would strengthen the law’s original intent,” the Medical FSA Improvement Act of 2013 (S. 966) has been endorsed by members of the Council for Affordable Health Coverage (CAHC) including the American Academy of Ophthalmology, American Osteopathic Association, Communicating for America, Healthcare Leadership Council, International Franchise Association, National Association for the Self-Employed, National Association of Health Underwriters, National Association of Manufacturers, National Retail Federation, Retail Industry Leaders Association, Small Business & Entrepreneurship Council. 

The full text of the bill follows:

A BILL

To amend the Internal Revenue Code of 1986 to increase participation in medical flexible spending arrangements.

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘Medical FSA Improvement Act of 2013’’

SEC. 2. ADDITION OF TAXABLE DISTRIBUTIONS.

(a) TREATMENT OF AMOUNTS EXPENDED FOR MEDICAL CARE.—Section 105 of the Internal Revenue Code of 1986 is amended by inserting at the end the following new subsection:

“(k) AMOUNTS PAID UNDER MEDICAL FLEXIBLE SPENDING ARRANGEMENTS.—

‘‘(1) APPLICATION OF SUBSECTION (b) AND SECTION 106.—For purposes of subsection (b) and section 106, a plan shall not fail to be treated as a flexible spending arrangement solely because such plan, in addition to reimbursing expenses incurred for medical care (as defined in subsection (b)) during the plan year, distributes to the employee all or a portion of the employee’s balance for the plan year.

‘‘(2) LIMITATION.—Paragraph (1) shall apply only in the case that the balance under such arrangement for a plan year is distributed after the close of the plan year to which the balance relates and not later than the end of the 7th month following the close of such plan year.

‘‘(3) TAX TREATMENT OF DISTRIBUTION.—Any distribution to which paragraph (1) applies shall be treated as remuneration of the employee for employment for the taxable year in which it is distributed.

‘‘(4) FLEXIBLE SPENDING ARRANGEMENT.— The term ‘flexible spending arrangement’ means a benefit program within the meaning of section 106(c)(2) (relating to long-term care benefits).’’.

(b) ADDITIONAL DEFERRED COMPENSATION EXCEPTION.—Paragraph (2) of section 125(d) of the Internal Revenue Code of 1986 is amended by inserting at the end the following new subparagraph:

‘‘(E) EXCEPTION FOR CERTAIN FLEXIBLE SPENDING ARRANGEMENTS.—Amounts distributed to the covered employee from a flexible spending arrangement (within the meaning of section 106(c)(2)) in accordance with the limitations under section 105(k) shall not be treated as deferred compensation for purposes of subparagraph (A).’’.

(c) CONFORMING AMENDMENT.—Section 409A(d)(1) of such Code is amended by striking ‘‘and’’ at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ‘‘, and’’, and by adding at the end the following:

‘‘(C) a flexible spending arrangement which is subject to section 105(k).’’.

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to plan years beginning after December 31, 2013.

(e) TRANSITION RULES.—In the case of plan years that begin before the effective date of this Act, in implementing the amendments made by this section a flexible spending arrangement may allow an individual to make a new election or to revise an existing election under such arrangement so long as such new or revised election is made within 90 days after the effective date of this Act.

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