Employees at some companies will now be able to carry over up to $500 in their health “flexible spending accounts” — FSAs — from one year to the next, under new rules announced Thursday by the U.S. Treasury and the Internal Revenue Service.
This effectively modifies the long-standing “use-or-lose” rule for these arrangements that enable employees to put aside pre-tax dollars for qualifying health expenses for a given year. Money that goes into FSAs is exempt from income and payroll taxes.
Under the government’s previous rules, any money that was not spent by the end of the year – or by March 15 if the employer adopted a grace period – was forfeited.
This use-or-lose rule kept many employees from taking advantage of FSAs. Only 25 percent of eligible workers participate in health care FSAs, according to WageWorks, a California company that administers the plans.
“An overwhelming majority of feedback from individuals, employers, and others requested that the use-or-lose rule for health FSAs be modified,” Treasury officials said in a statement.
Comments focused on 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, Treasury said.
Some plan sponsors may be eligible to adopt a carryover provision as early as plan year 2013.
Additionally, 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: it can have one or the other or neither.