Q: How can workers set aside money tax-free for health care and dependent care expenses?
A: The federal tax code allows workers to take advantage of flexible savings accounts set up through their employer using tax-free earnings. On Jan. 1 each year, eligible workers may divert a designated amount from each paycheck, tax-free, to a savings account that may be used for out-of-pocket medical and childcare expenses. It’s good public policy that encourages working families to plan ahead and helps stretch their paychecks to make ends meet. Unfortunately, a decades-old administrative rule effectively discourages more workers from taking advantage of the program. If workers choose to participate, they also put their hard-earned money on the line under a "use-it or lose-it" clause. That’s because any unused funds at the end of the calendar year reverts to the employer, not back to the employee.
Q: What is the "use-it or lose-it" clause?
A: Long-held federal rules act as a deterrent that block more employees from benefiting from these tax-advantaged savings accounts. Many employees fail to enroll because of the "use it or lose it" rule, or they purposefully under-budget their contributions at the beginning of the year out of concern they may lose unused contributions. Many workers even end up making frivolous health care purchases at the end of the year just to use up the money. As chairman of the Senate Finance Committee, which handles federal tax policy, I’ve asked Treasury Secretary Snow to have the Treasury Department look at re-writing the rule to make this employee benefit more user-friendly. Fixing the unreasonable risk of losing set-aside wages at year’s end makes enormous sense. Making flexible spending accounts more appealing also would give workers an affordable incentive to make responsible health care decisions. Employer groups estimate that only 20 to 30 percent of employees who have access to a flexible spending account actually participate. An umbrella of employer organizations, including the National Federation of Independent Business, the National Rural Electric Cooperative Association, the National Restaurant Association and U.S. Chamber of Commerce, wrote the Treasury Department in October to support my appeal to fix the "use-it or lose-it" clause so that more workers may take advantage of this employee benefit. As it stands now, the current rule unjustly enriches employers at the expense of hard-working employees who participate. From my leadership position in the Senate, I’ll continue aggressive oversight over the federal bureaucracy to replace such Washington nonsense with Midwestern common sense.