The Internal Revenue Service (IRS) has decided to let holders of health flexible spending arrangements (FSA) roll over up to $500 in account balance from one year to the next without worrying about the infamous “use-it-or-lose-it” rule.”
Officials at the IRS, an arm of the U.S. Treasury Department, have discussed the change in IRS Notice 2013-71, and they also talk in the notice about how they will make the change available to workers at employers with non-calendar plan years. The change takes effect immediately.
FSAs give workers a vehicle for setting aside cash to pay for health care expenses without paying income taxes on the cash.
The IRS tried to discourage high-income workers from using FSAs as investment accounts by requiring them to forfeit any unused cash at the end of the plan year. The employers got to keep any cash forfeited.
In 2005, the IRS tried to ease the burden the rule caused by creating a grace period. The grace period rule gave FSA holders the ability to avoid losing FSA cash by using the cash up to two months and 15 days after the end of the plan year.
In 2010, the drafters of the Patient Protection and Affordable Care Act (PPACA) tried to generate revenue to cover part of the cost of PPACA by capping the deductibility of FSA contributions at $2,500 per year.