Health care reform
Employees with Flexible Spending Accounts (FSAs) now have a little more flexibility. A recent rule modification from the Internal Revenue Service (IRS) now allows FSA holders to roll over up to $500 of savings for use in the following year.1,2
FSAs are pre-tax savings accounts, typically employee funded, that are used to reimburse employees for qualified medical expenses. The new rule changes the longstanding “use-it-or-lose-it” rule, which required that employees spend their FSA savings during the year in which the savings were accrued. For employees, predicting how much money they needed to save for that year’s medical expenses was often tricky, sometimes leading to lost money when they saved more than they spent.
Employers retain the ability to offer a grace period (up to a 75-day extension) on spending the unused funds. However, they cannot offer both a grace period and the $500 rollover. They must choose one or the other and amend their plans if necessary.3
Under the Patient Protection and Affordable Care Act (PPACA), as of January 1, 2013, the pre-tax contributions an employee can make to an FSA under an employer cafeteria plan were limited to $2,500 and indexed for inflation. This provision limits the tax savings on medical spending that FSAs provide, to help offset the costs of the reform program. It is also based on the assumption that health care reform will lessen the need to save for medical expenses.4 The new $500 rollover rule does not increase the maximum contributions an employee can make.5
The IRS notice discussing the rule change indicates that rules for employers with non-calendar plan years are forthcoming. The change takes effect immediately. FSAs should not be confused with Health Reimbursement Accounts, which have different requirements.
Employers may need to amend their plans to add a rollover provision to their FSA plan document and eliminate any grace period provision. They will also need to clearly communicate this change to employees.
Employees will now be able to roll over $500 of unused funds in their FSAs without a penalty and without losing those funds. Employees will still need to be mindful of their allocations and ensure they are saving appropriately.