Treasury, IRS Change FSA Use-or-Lose Rule

Under updated guidance, up to $500 can now be rolled over the following year

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The U.S. Treasury Department and the Internal Revenue Service announced Thursday that they have modified the use-it-or-lose-it rule for Flexible Spending Arrangements to allow a $500 portion to now be rolled over the following year.

Treasury and IRS issued a notice on their updated guidance, which both said permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances at the end of a plan year. Before the change, any account balances remaining unused at the end of the year had to be forfeited.

“Across the administration, we are always looking for ways to provide added flexibility and common-sense solutions to how people pay for their health care,” said Treasury Secretary Jacob Lew, in releasing the updated guidance. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”

An estimated 14 million families participate in health FSAs, which allow employees to contribute pretax dollars to pay for health care expenses.

The change comes in response to public comments from individuals and employers that requested the "use-or-lose" rule be modified, with most commenters pointing to 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 and IRS said that “some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013.”

Also, “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.”

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