'Flexible spending' rollover sought
By S.P. Dinnen
Des Moines Register
Rodney White • Des Moines Register
Elizabeth Ray knows why she's one of the few employees at Rockwell Collins taking advantage of a tax break on health and childcare costs: Flexible spending accounts can be a gamble.
Van D.B. Clark Jr., owner of Modern Optical in Des Moines, Iowa, fits glasses for Bonita Draman.Clark says extra business flows into his shop every December because of a quirk in flexible spending accounts that requires that all money left unspent in the account at the end of the year be forfeited.
Ray sets aside $1,000 to $1,200 of before-tax pay every year for healthcare expenses that aren't covered by insurance. But if she miscalculates and needs less money for orthodontist visits and prescription drugs, the money can disappear — or she'll be forced to use it on something she doesn't really need.
Rockwell Collins, Cedar Rapids, an Iowa-based information technology company, is among the companies that want the federal government to change the "use it or lose it" rule. Under one proposal, employees could roll over $500 in flexible spending accounts to the next year.
Sen. Charles Grassley, R-Iowa, has asked Treasury Secretary John Snow to consider changing the rule.
"I have heard from numerous Iowans and from taxpayers across the country that the rule makes no sense," Grassley wrote to Snow. The senator said the Treasury Department could amend the administrative rule because it is not a law.
A key part of the spending plans is an Internal Revenue Service ruling that employees cannot retrieve any unspent money at year-end. That prevents workers from parking part of their wages in an account, and rather than spend it on healthcare, reclaim the money at year-end and avoid income taxes.
Used properly, flexible spending accounts can be a great tax break for workers. There are catches, however: Pros • Reduce participant's federal and state taxable income by amount contributed. • Contribution can be retrieved tax-free when spent on eligible items. • Entire year's contribution is available at start of the year. Cons • Restrictions on qualifying expenses, and even on the amount that can be paid in, vary from employer to employer. • Paperwork can be a hassle. • Money contributed but not spent by year-end is lost forever. For further information, check out IRS Pub. 503, Child and Dependent Care Expenses (www.irs.gov/publications/p503/index.html) or IRS Pub. 502, Medical and Dental Expenses (www.irs.gov/publications/p502/ar01.html). Source: Des Moines Register
Because of the rule, a worker who contributes $2,000, for example, but spends only $1,700 loses the $300. The plan sponsor, the employer, typically impounds that money to offset its expenses incurred running the program.
Good and bad points of FSA
Nationally, about 25 percent of eligible employees participate in the plans, according to the Employers Council on Flexible Compensation. About two-thirds of employers nationwide offer flexible spending accounts, said Bonnie Whyte, executive director of the group.
At Principal Financial Group Inc., 28 percent of eligible employees have enrolled in the program for healthcare. Yet, 91 percent of the Des Moines-based company's workers participate in its 401(k) plan.
Changing the flexible spending rule would improve a "terrific benefit," said Ray, a 23-year Rockwell employee. "This would encourage more people to give it a try, if there were a safety net."
Despite prudent planning, Ray has faced losing money at year-end.
"I was burned early on. I had to come up with a way to spend 300 or 400 dollars," she said.
Her husband ended up with a nicer pair of eyeglass frames, she said, but "we sure didn't need to spend the money." Ray carefully plans her spending each year for her family, which includes children ages 12 and 14.
Bills have passed the U.S. House, but have not fared well in the Senate. The legislation would allow workers to roll over to the next benefit year some portion — $500 is one proposal — of any unspent money.
Whyte said opposition to expanding flexible spending accounts seems to come from people who think it would reduce tax revenue. And she said others believe it helps the wealthy over the poor, who don't have access to a plan or the ability to use it properly.
The IRS has altered course before. Last year, the IRS said plan participants could use their set-aside to pay for over-the-counter drugs, reversing its long-held position to the contrary.
