August 25, 2004
BB 04—90

In this issue:

  • Congress Urges Treasury to Eliminate FSA "Use it or Lose it" Rule
  • Council Joins Coalition Outlining "Smart 4" Alternative for Late Trading Abuses

Congress Urges Treasury to Eliminate FSA "Use it or Lose it" Rule

Chairman of the Senate Finance Committee Charles Grassley (R-IA) has sent a letter to Treasury Secretary John Snow stating that Treasury has the authority to eliminate the Flexible Spending Arrangement (FSA) "use it or lose it" rule without additional legislation from Congress. According to the letter, "since the 'use it or lose it' rule was created administratively — and was done so through proposed regulations that have never been finalized — it would seem that the Treasury Department does have the authority." Grassley cites three primary policy reasons for the elimination of the rule, which has been proposed as legislation but not passed:

  • There is "no other area of benefit law in which [Congress] allows — let alone mandates — that employee dollars set aside for benefit expenses revert back to the employer."
  • The "use it or lose it" rule causes "inefficient allocation of health care dollars by providing an incentive for employees to incur unnecessary health care expenses at the end of the year to use up the account."
  • The "use it or lose it" rule has the effect of "dramatically reducing employee participation in FSAs because employees do not want to risk forfeiting or wasting their hard-earned money."

The Council strongly supports elimination of the "use is or lose it rule" and has provided technical assistance and comments to support the recent efforts by Grassley to raise this issue with the Treasury Department. A provision of the House-passed Medicare Modernization Act of 2003 would have permitted a $500 rollover of unspent FSA funds, but the provision was dropped by the Medicare conferees prior to enactment.

For more information, please contact Paul Dennett, Council vice president, health policy, at (202) 289-6700.

Council Joins Coalition Outlining "Smart 4" Alternative for Late Trading Abuses

The Council, along with a number of other business and employer organizations, has provided to the Treasury Department a supplemental outline of the "Smart 4" proposal designed to curb mutual fund late-trading abuses. The "Smart 4" proposal is an alternative to the SEC's strict 4:00 p.m. Eastern Time trading deadline, which plan sponsors believe will unfairly impact defined contribution plan participants.

The "Smart 4" proposal would require any intermediaries (i.e., third-party administrators) that wish to receive mutual fund orders up until Market Close and then process them and deliver them to fund companies after Market Close to implement certain procedures, using a combination of technological controls, executive certification, and independent verification to ensure the integrity of the transaction. These intermediaries must file a certification with the SEC indicating that its processes to prevent late trading equal or exceed the SEC's published guidelines, and that those systems are working properly. Any entity that does not to comply with these requirements would be subject to the strict 4:00 deadline. By placing the liability on the SEC-certified intermediary, the SEC can allow those intermediaries the flexibility to design whatever contractual or technological solution they like to ensure compliance.

On August 24, the coalition met with SEC officials to discuss the supplemental outline. The SEC officials indicated continued concerns that the proposal would not provide sufficient assurance against late trading and would require extensive SEC oversight. However, they indicated that they would review the coalition's "Smart 4" proposal further and are still interested in receiving input on ways to strengthen the protections against late trading in the "Smart 4" proposal. The SEC is expected to issue final guidance before the end of the year.

For more information, contact Lynn Dudley, Council vice president and senior counsel, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.