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You need to spend all the money in your Flexible Spending Accounts. Here's why

AYESHA RASCOE, HOST:

Medical flexible spending accounts can save you lots of money, but they can also come back to haunt you. That's because whatever money you have left over in your account at the end of the spending period goes back to your employer. For some people, that deadline was December 31. Others have until March 15. But, you know, even though that's some time, they still got to hurry up. UCLA professor Steve Bank joins us now to explain why these accounts work this way. Welcome to the program.

STEVE BANK: Thanks for having me.

RASCOE: So, Professor Bank, you know, what's the deal with these accounts? Like, why do you have to give up your own money at the end of the spending period?

BANK: Well, one way to think about it is it's not really your own money. Now...

RASCOE: It's not my money?

BANK: ...You may object to that.

RASCOE: (Laughter) It's not my money?

BANK: Here's the way that Congress thinks about it, or at least the way they originally thought about it. Flexible spending accounts are a way for you to make a deal with your employer that in lieu of your salary, you're going to take certain benefits. It's not you took your salary, and you put it into an account that was yours. It's you took some salary equivalent and took benefits instead.

RASCOE: And the salary is taxed. This is not taxed.

BANK: Exactly. You are - part of the deal is, is you get it tax free. Part of the downside is, is they tell you what you can spend it on and how much you can spend.

RASCOE: But I guess I want to ask, too, is, like, why can't that money roll over from year to year?

BANK: You have to understand a little bit about the history to understand what it's called the use it or lose it provision. Originally, the flexible spending accounts had no cap. You could divert half your salary to flexible spending accounts, and that would be okay. The concern was that people were doing it to avoid taxes on their salary, right? It's essentially a shelter. So use it or lose it says, hey, you have to predict this is what you're going to spend on health costs. You can only spend it on these eligible medical expenses. And you have to do it within a year.

RASCOE: OK. But then that leaves the situations like a situation that I was in where I lost the money because I, you know, I didn't quite know what I was doing with the FSA. It was my first year. Money Magazine last year estimated that people forfeited more than $3 billion a year through these FSAs. That's a lot of money. Where does it go?

BANK: Yeah, that is a lot of money. And then the money is essentially back to the employer. The employer essentially never spent it. You agreed with the flexible spending account to reduce your salary. The employer agreed to provide you a benefit. If you don't use that benefit, then the employer just never had to spend on it.

RASCOE: People do have this thing called transportation flexible spending accounts that they use on, like, parking and public transportation. For those, you can roll over your balance from one year to the next. Like, if that works for transportation, why not for health care? Or is, you know, Congress being logical, right? Like, is there really a big difference between, like, spending on transportation or spending on health care?

BANK: Some of the explanation for the differences in the treatment is that they were enacted at different times in history. So the original is the health care flexible spending account. That was in part to provide a benefit to workers when CEOs and top executives of corporations had for years in the '50s, '60s and early '70s been diverting part of their salary to benefits that were only for them, health care benefits only for them. But they're very worried about flexible spending accounts being used to avoid taxes. And so they put this use it or lose it.

The transportation FSA is much more recent. This was enacted at a time when Congress was feeling in some ways less concerned about the tax avoidance risks, that you would divert all your salary there. There is a technical explanation for a difference between transportation and health. But in general, they were in different time periods.

RASCOE: Some lucky people still have almost 2 1/2 months to spend the balance in their flexible spending accounts. Do you have any advice for those people?

BANK: Think about the things that you need but you might not otherwise spend on. So if there's a doctor like a dermatologist or something that's not covered by your health insurance, it might be time to schedule an appointment, right? That would be probably a more useful way of using your flexible spending account as a push to spend on sort of necessary medical expenses that people often forgo because it's not covered by their health insurance.

RASCOE: That's Steve Bank. He's the Paul Hastings professor of business law at UCLA. Thank you so much for joining us.

BANK: Thanks for having me. Transcript provided by NPR, Copyright NPR.

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Ayesha Rascoe is a White House correspondent for NPR. She is currently covering her third presidential administration. Rascoe's White House coverage has included a number of high profile foreign trips, including President Trump's 2019 summit with North Korean leader Kim Jong Un in Hanoi, Vietnam, and President Obama's final NATO summit in Warsaw, Poland in 2016. As a part of the White House team, she's also a regular on the NPR Politics Podcast.
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