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FSA "Use-It-Or-Lose-It" Rules Modified

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Did you know that last October the U.S. Department of the Treasury (DOT) made modifications to rules governing Flexible Spending Accounts, commonly known as FSAs, and their "use-it-or-lose-it" clause? To make FSAs more "consumer-friendly" and provide "added flexibility," employers may now allow plan participants to carry over up to $500 of their unused FSA balances remaining at the end of a plan year, according to a press release from the Department.

Many organizations offer FSAs in addition to employee health insurance coverage as a way for employees to 'save' or contribute funds to be used for qualifying medical expenses (such as prescriptions, insulin, contacts, co-pays, medical stays/visits and resulting bills, etc.). These contributions are excluded from gross income, meaning that the funds can be used without federal or employment taxes being deducted.

In announcing the change to FSA rules, U.S. DOT Secretary Jacob J. Lew explained, "Across the administration, we are always looking for ways to provide added flexibility and commonsense solutions to how people pay for their healthcare. Today's announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year."

The DOTs rule change keeps in place an existing option for FSA plan sponsors to allow employees a grace period after the end of the plan year. However, a FSA cannot have both a carryover and a grace period. It can only have one or the other or neither.  

What does this mean for an individual with an FSA?

SHRM noted in a recent article "FSA Use-it-or-Lose-it Rule Modified" that some 14 million employees nationally participate in FSAs, making this seemingly small change quite large when it comes to spending, healthcare, patient wellbeing, taxes, and HR's management of benefits. The hope is that by loosening the "use-it-or-lose-it" rule, more people will participate in FSAs and utilize the funds they have allocated rather than losing them at the end of the year.

For more information, contact your HR department and/or review this IRS Fact Sheet.


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