The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have changed the "use-or-lose" rule for health flexible spending arrangements (FSAs) to allow up to $500 to be carried over to the next year.
An estimated 14 million families participate in health FSAs, which let employees put pretax dollars from their paycheck into an account to pay for qualified medical, dental, and vision expenses during the year.
To make health FSAs more consumer-friendly and provide added flexibility, the updated guidance permits employers to allow employees to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year.
Previously, any account balances remaining unused at the end of the year were forfeited. Plan sponsors had the option of allowing employees a grace period permitting them to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to two-and-a-half months following year-end.
Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013. In addition, the existing option for plan sponsors to allow employees a grace period after the end of the plan year remains in place. However, a health FSA cannot have both a carryover and a grace period -- only one or the other or neither.
The change is in response to public comments invited by the Department of the Treasury and the IRS. An overwhelming majority of feedback from individuals, employers, and others requested that rule for health FSAs be modified. Comments pointed to the difficulty for employees of predicting future needs for medical expenditures, the need to make FSAs accessible to employees of all income levels, and the desire to minimize incentives for unnecessary spending at the end of the year.
