By  June 7, 2012 •
The House of Representatives approved a measure to amend the FSA “use-it-or-lose-it” provision

Despite a White House veto threat, the House on Thursday approved legislation that would amend a 28-year-old rule requiring flexible spending account users to forfeit their unused balances. The bill also lifts restrictions on using FSAs and health savings accounts for over-the-counter drugs.

Under the measure, employers can allow employees to withdraw taxable money up to $500 that’s sitting in unused FSA balances at the end of the plan year or at the end of a grace period. The law also overturns a health reform provision that prohibits FSA and HSA users from getting reimbursement for OTC drugs without a prescription. Distributions for drugs without a prescription face a 20 percent federal tax.

Lawmakers approved the legislation 270-146.

The FSA and HSA provisions are part of a broader bill, sponsored by Rep. Erik Paulsen, R-Minn., that repeals a tax on medical device makers.

According to the Associated Press, “Most Democrats said the bill was yet another GOP attempt to weaken President Barack Obama’s health care overhaul, which created the tax to help pay for that law’s expansion of health care coverage to 30 million Americans.

“Repealing the tax would cost the government $29 billion over the coming decade. To pay for that, Republicans included a provision — also opposed by Democrats — raising $44 billion by erasing limits on money the government could recover in overpayments to lower-earning people who will get insurance subsidies under the health care law.”

The HSA and FSA provisions alone would have a price tag of $8 billion, according to the Associated Press.

The House-approved bill comes just after the IRS announced that it would take comments during its consideration to modify the “use-it-or-lose-it” rule.

SmartMoney.com cites a study from Mercer that found the average FSA participant who forfeited funds lost $43 to $60 in 2010. In 2013, a health reform law will limit FSA contributions to $2,500.

“The ‘use-or-lose’ provision was originally designed to make sure FSAs, which allow participants to set aside pre-tax dollars for various eligible expenses, wouldn’t be improperly used as tax shelters. Since the new health care law caps health care FSA contributions at $2,500, this original purpose of ‘use-or-lose’ is invalid,” said Jody Dietel, chief compliance officer at WageWorks, in a recent BenefitsPro blog. “Instead, ‘use-or-lose’ has created a system which forces account holders to spend down their balance at the end of their plan year and simultaneously deters potential account holders from enrolling for fear of losing unused funds.”