The Medical FSA Improvement Act of 2011

Medical FSA Improvement Act of 2011 — Amends the Internal Revenue Code to allow amounts in a flexible spending arrangement (FSA) that are not spent for medical care to be distributed to the FSA participant as taxable income after the close of a plan year (currently, such unspent amounts are forfeited). Includes such FSAs in the definition of tax-exempt cafeteria plans.

A new bill has been introduced in the U.S. House of Representatives that would allow consumers to use and pay taxes on all remaining funds in their medical flexible spending accounts (FSAs) instead of turning the balances over to employers as the current law requires. The Medical Flexible Spending Account Improvement Act (H.R. 1004) was introduced by John Larson (D-Conn.) and Charles Boustany (R-La.) because they say that current “use it or lose it” rule deters employees from saving for medical expenses.

However, employer advocates say that the bill is likely to be unpopular with employers unless Congress changes other FSA rules. For example, employees are able to receive reimbursement for the full amount of their FSA account budgets at any time during the year. Abuse can potentially occur if an employee withdraws the full amount early in the year, before the pre-tax funds have been taken out of their paychecks, and then leaves the company — a risk that the “use it or lose it” provision was designed to offset.