It’s the time of year for stocking up on eyeglasses, prescription meds, or any other excuse to empty out your flex spending account. According to a 1978 law, the IRS allows employees of participating companies to set aside pretax income for medical expenses throughout the calendar year. But if you don’t spend the money in time, it goes away. Where, exactly, does it go?
It’s up to your boss. One-third of employees end up with some leftover cash in their accounts, and employers have a few choices for what they can do with it. They can donate the money to charity, split it up among the workers who are participating in your health plan, or use it to offset the costs of administering the program. Under no circumstances can your boss give your unused money back to you. (That would invalidate the fund’s tax-exempt status.) According to IRS rules, a business can also give its employees a 2½-month grace period for spending the dollars that were set aside. But this is strictly optional, and not every employer is so generous.
Unions have long argued that businesses shouldn’t be allowed to keep the unspent funds, since they, too, realize a tax benefit from the program. Just as a worker is exempt from paying income tax on health-savings or flex-spending money, so, too, are employers exempt from Social Security and Medicare taxes. The employers counter that they need the end-of-year cash for expenses: Many hire third-party companies to keep track of paperwork and send out flex-spending debit cards. (This costs between $70 and $120 for each employee per year.) When all is said and done, a company might lose money on its flex-spending program or it might turn a profit off the tax-savings—it all depends on the size of the business and how much money each worker squirrels away.
There’s some irony in the end-of-year rush to blow flex-spending funds, since some early advocates for the program thought it would prevent medical shopping sprees. In the late 1970s, policymakers began to worry that generous health insurance plans were encouraging overuse of the health care system, driving up demand and prices. So they devised the tax-free accounts as a way to wean consumers off luxurious benefits.
While the accounts never did much to rein in spending, the situation only got worse when the IRS imposed the use-it-or-lose-it rule in 1983. (Some felt that high-income employees were using the plans to shield large amounts of income from Uncle Sam.) Today, most experts agree that the accounts only increase the cost of health care.
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