One of the biggest gripes most people have with the Flexible Spending Account is the rule that you must "Use it or Lose it". This can lead to people frantically running around just before their money expires trying to rack up eligible expenses they probably don't need. And so I wonder, why was the FSA designed this way?
One plausible answer is that many FSA plans have the concept of eligible events which enable an employee to use their FSA money in advance of having paid enough money into their account. Sometimes those employees end up leaving before the funds are paid back (because they quit or get laid off/fired), and then the employer is out the money. One way an employer can help recoup those potential losses is by expiring extra FSA funds that are not used in time. But I don't like that answer, and here's why:
- It shouldn't be the case that current employees might have to pay for ex-employees medical expenses.
- The responsible and frugal person could be penalized, whereas a potential deviant person (someone who purposely spends their entire FSA and quits their job shortly after) is rewarded.
It seems to me that it would be significantly more fair if the following rules existed instead:
- You cannot spend more than is in your account.
- Extra FSA funds at the end of the time frame are given back to you and added to your income. (Since it was subtracted from your income when you paid that amount into the plan.)
Now, to prevent this question from being marked as "too broad" or "primarily opinion based", I should clarify what I'm asking:
Given that employees generally dislike that FSA plans are Use-it-or-Lose-it, and also that there appears to be an obvious alternative that would be preferable, what is the rationale for defining the FSA plan in such a way?
Side note: Prior to 2005 the funds in an FSA account expired at the end of the 12 month plan, and this was even worse than it is today, whereas now most employers elect to allow a 2.5 month grace period.