Flexible spending accounts and the use-it-or-lose-it provision

James Cardon, Jeffrey T. Denning and Mark H. Showalter

Applied Economics, 2013, vol. 45, issue 35, 4928-4939

Abstract: Flexible spending accounts (FSAs) are a widely used arrangement that allow employees to pay for qualified out-of-pocket health expenses with pre-tax dollars. The original structure of FSAs included a significant forfeiture risk if households had unused funds in their accounts at the end of the year. In 2005, the US Treasury made an administrative ruling that offered a grace period for spending FSA funds after the end of the calendar year, thereby substantially reducing forfeiture risk. We use a unique panel data set to evaluate the effects of this rule change.We find that the change increased FSA participation rates by about 4 percentage points (17% increase from a 23.9% baseline). We also find that FSA election amounts increased by just over 3%, though this result is more fragile.

Date: 2013
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DOI: 10.1080/00036846.2013.808308

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