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Thursday, November 7, 2013

Federal Government Modifies "Use-Or-Lose" Rule for FSA’s

The use-or-lose rule, long a sticking point for employees contemplating participation in flexible spending accounts (also known as FSA's or Section 125 accounts), has become a little more flexible going forward. Now employers offering FSA's can modify their plans to allow for a carryover of up to $500 into the following year, or maintain the grace period which allows employees until March 15th of the following year to use FSA dollars from the previous year. Employees can still contribute a maximum of $2,500 in a year even though they have carried over money from the previous year.

FSA's or Section 125 accounts allow employees to divert wages, on a pre-tax basis, to pay for qualified medical expenses and child care. Until 2005, the IRS rule required that all of the wages diverted to the FSA in a plan year had to be spent by December 31st of that year (or the end of the FSA plan year) otherwise the unused money would be forfeited by the employee. Routinely, as the end of the year approached, employees would stock up on contact lenses, eye glasses and the like so as to not lose their FSA dollars. Worse yet, many employees chose to forego participation because they were unsure of how much or whether they would actually incur medical expenses in the upcoming year.
The IRS granted some relief to the use or lose rule in 2005 when it allowed a grace period of two months and fifteen (15) days, or until March 15th, for employees to use their FSA dollars from the previous year. This new modification allows for employees to save up to $500 of unused FSA contributions for the following year, while still making the maximum allowable contribution for that year into the plan. These modifications only apply to health FSA's and do not modify child care FSA's.
The timing of the IRS modifications means many employers have to act fast to modify their plans if they so choose. Many employers will soon enter or are already in the open enrollment period for FSA election for 2014. Because employers can only offer either the carryover or maintain the grace period, they should carefully consider whether to change their plan. A review of plan usage, or an employee survey may aid employers in reaching this decision. 
Post Authored by Margaret Kostopulos, Ancel Glink


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