House approves changes to flexible spending account use it or lose it rule

WASHINGTON—Defying a presidential veto threat, the House of Representatives on Thursday approved legislation that would ease a 28-year-old Internal Revenue Service rule that requires forfeiture of unused flexible spending account balances and eliminates restrictions on using FSAs and health savings accounts to pay for over-the-counter medications.

Under the measure, approved on a 270-146 vote, employers could amend their FSAs to allow employees to withdraw as taxable cash up to $500 in unused balances remaining at the end of the plan year or at the end of an FSA grace period, if an employer has that feature.

In addition, H.R. 436 would overturn a health care reform law provision that bars FSA reimbursement of OTC medications without a prescription and imposes a 20% federal tax on HSA distributions for OTC medications obtained without a prescription.

Those provisions are part of a broader bill that would repeal a Patient Protection and Affordable Care Act provision that imposes new federal excise taxes on certain medical devices and boosts repayments of federal premium subsidies provided to low-income and middle-class uninsured individuals in situations in which the subsidies turn out to be higher than the individuals were entitled.

It is those provisions that the administration opposes.

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“This excise tax is one of several designed so that industries that gain from the coverage expansion will help offset the cost of that expansion,” the Office of Management and Budget said Wednesday in a statement.

“In sum, H.R. 436 would fund tax breaks for industry by raising taxes on middle-class and low-income families. Instead of working together to reduce health care costs, H.R. 436 chooses to refight old political battles over health care. If the president were presented with H.R. 436, his senior advisers would recommend that he veto the bill,” OBM said.

President Barack Obama, though, may not have an opportunity to carry out his veto threat as the Senate may not even take up the proposal, some benefit observers say.

“I don't think the Senate will act,” said J.D. Piro, a senior vp at Aon Hewitt in Norwalk, Conn.

Bundling the FSA provisions with the repeal of the excise taxes on medical devices makes the bill's chances of winning Senate approval “very unlikely,” said Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.

Giving FSA participants the ability to receive up to $500 of unused balances would have only a modest impact on boosting plan participation and would be somewhat administratively burdensome on employers, Mr. Piro said.