The U.S. Treasury and IRS issued a notice last week to amend the “use-or-lose” rule for flexible spending arrangements to permit employers to allow plan participants to carry over up to $500 of unused health FSA balances at the end of the plan year.
The notice is in response to public comments from individuals, employers and others who requested the rule for health FSAs to be modified, noting difficulty in predicting future needs for medical expenses, the need to make FSAs more accessible to various income levels and the desire to minimize the incentive for unnecessary spending at the end of the year.
“Across the administration, we are always looking for ways to provide added flexibility and commonsense solutions to how people pay for their healthcare,” Treasury Secretary Jack Lew said. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”
For the past 30 years, health FSA-eligible employees have had to forfeit remaining account balances at the end of the plan year. Under the current law, plan sponsors can offer employees a grace period to use remaining FSA funds at the end of the year to pay qualified expenses incurred up to two and a half months after year’s end.
The rule change will allow some plan sponsors to adopt a carryover provision as early as the 2013 plan year, and sponsors will continue to have the option to extend a grace period. Health FSA, however, cannot have both a carryover and grace period; it must have one or the other.