By Jim Donovan: The U.S. Department of the Treasury and the IRS are modifying the longstanding “use-or-lose” rule for health flexible spending arrangements (FSAs). To make health FSAs more consumer-friendly and provide added flexibility, employers can now allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year.
For nearly 30 years, employees eligible for health FSAs have been subject to the use-or-lose rule, meaning that any account balances remaining unused at the end of the year are forfeited. An estimated 14 million families participate in health FSAs. Under current law, plan sponsors have 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.
Employers can now allow employees to carry over up to $500 of the unused amounts left in their health FSAs for expenses in the next year. 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: it can have one or the other or neither.