Treasury officials hesitant to alter flexible spending account rule

The Treasury Department does not want employees to roll their money over from year to year in their flexible health care spending accounts, because it could detract from the popularity of the new Health Savings Accounts, the agency announced in a letter last month.

Federal employees were authorized to establish Flexible Spending Accounts in 2003, although they have been available in the private sector for much longer. Workers can put pretax dollars into the accounts for some expenses not covered by standard health insurance, but they forfeit money that is not spent by the end of the year. Senate Finance Committee Chairman Charles Grassley, R-Iowa, has been pressuring Treasury officials to alter or remove that regulation-which is also known as the "use it or lose it" rule.

HSAs were recently introduced by the Treasury Department and will be available to federal employees during open enrollment periods this year. Federal workers will be able to contribute pretax earnings, plus employer contributions, to the accounts. The money will stay in the HSA until it is used. Federal regulations require that employees who open the accounts also enroll in a high-deductible health insurance plan, in case of a catastrophic injury.

Treasury Secretary John Snow said Flexible Spending Accounts would become too popular if employees are allowed to carry money from year to year. Grassley sharply criticized the agency, however, for its refusal to lift the restriction.

"That rule doesn't pass the common sense test, and it's hurt taxpayers," the senator said Wednesday. "I want to resolve this issue, and I'm looking for the best way to do that. Americans need every possible tool to meet their health care expenses."

"Treasury has also concluded that elimination of the 'use it or lose it' rule will impact other important health care priorities of the Congress and this administration," Snow wrote in a Dec. 23 letter to Grassley. "Treasury economists have estimated that there may be a reduction of up to 10 percent of the number of Health Savings Accounts established if the 'use it or lose it' rule is eliminated."

Snow said the White House prefers that workers use HSAs, because they are accompanied by a high-deductible health insurance plan. Employees with HSAs and high-deductible plans are expected to spend less on health insurance, according to Snow.

"Amounts cannot be contributed to an HSA unless the HSA owner is participating in a high-deductible health plan, an important policy goal which, combined with the financial incentives of the HSA, will help reduce overall health care spending," Snow wrote in the letter.

Snow added that Treasury does not have the authority to change the regulation. The department put the rule in place to satisfy congressional mandates on deferred compensation, he argued, so only Congress can remove the rule.

Grassley rejected that argument on Wednesday.

"I also don't understand the argument that the Treasury Department and the IRS don't have the power to change the rule," he said. "If they wrote it, surely they have the power to change it."