The U.S. Department of the Treasury and The IRS issued a notice modifying the longstanding “use-or-lose” rule for health flexible spending arrangements (FSAs). For the first time, at the plan sponsor’s option, employees participating in health FSAs will be allowed to carry over up to $500 of unused amounts remaining at year-end.
The change makes health FSAs more consumer friendly by relaxing the use-or-lose rule. This will enable employers to permit employees to use up to $500 of unsued health FSA amounts in the next year, instead of forfeiting the unused amounts.
How does this help consumers?
Individuals can now participate in a health FSA without the risk of losing all of their unused contributions. This also cuts back on wasteful year-end FSA healthcare spending by limiting the risk of forfeiture, and in turn, reducing the incentive to spend down as year-end approaches in order to avoid losing unused funds.
How do employers participate?
An employer that sponsors a health FSA can choose to allow its employees to carry over unused amounts of up to $500 to reimburse qualified medical expenses incurred during the following year. In addition, 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.