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Small Business Employee Benefits and HR Blog

Flexible Spending Accounts (FSAs) - New 'Use It Or Lose It' Rules

On October 31, 2013 the US Treasury and IRS announced a modification to health Flexible Spending Accounts (FSAs). Specifically, employers can now allow up to $500 in unused health FSA balances to rollover to the next year. 

flexible spending account new rules

About FSAs

FSAs are sponsored by employers, and are (usually) 100% employee funded. FSAs are one way for employees to use pre-tax dollars to pay for medical expenses, such as doctor visit copays, vision expenses, and prescription drug costs. 

FSA 'Use It Or Lose It' Rules

Since the creation of FSAs in the 1970's, FSAs have been “use it or lose it” - meaning if an employee did not use the funds in the FSA by the end of the plan year they forfeited those funds to the employer. Currently, most forfeited amounts are less than $500, according to the US Treasury. Under the change, employers now have a choice of allowing employees to carryover up to $500. In 2005, the Treasury allowed a 2.5 month grace period for spending down FSAs, as a way of softening the “use it or lose it” rule. Employers now will be able to offer either the grace period or the $500 rollover provision, though not both.

Treasury officials began taking public comments on the change last year (June 2012), and they said the response was overwhelmingly in favor of giving employees more flexibility. The new rules go into effect immediately, but they are not mandatory for employers. Employers can decide whether to make the change and when to make it by adjusting their plan documents. As such, employers are most likely to make any changes in 2014 and 2015 when they start a new plan year.

Click here for IRS Notice 2013 -71.

14 Million Families Use FSAs

Federal officials estimated that 14 million American families use FSAsIn a recent survey of large employers conducted by Mercer, 86% offered health FSAs, but only 23% of employees participated. The average employee contribution was $1,484 last year and the percentage of overall dollars forfeited was 4%.

According to the Treasury, the rule change could reduce the incentive by employees for unnecessary spending at year-end to avoid losing the money set aside. Because of the “use it or lose it” rule many employees are reluctant to put money into the plans for fear of losing whatever they don't use. However, many employees also see FSAs as "old school". For example, when given the option, it's smarter to put funds into a Health Savings Accounts (HSAs) rather than an FSA because the funds are more flexible and allow full rollover with an HSA.

Will this new rule impact how many people use FSAs? I doubt it. What do you think? Leave a comment.

Read more about FSAs:

The Comprehensive Guide to the Small Business HRA

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