IRS Aims to Make FSA more Flexible

If you have ever found yourself frantically digging through old receipts in an attempt to claim the remaining dollars in your Flexible Spending Account (FSA) before the end of the year—or worse, realizing with dismay on January 1st that you still had money in the account—you know how frustrating the IRS’ “Use or Lose” rule for FSAs has been in the past.

That’s right—in the past. Last month the IRS announced a few changes in this rule, which gives employers the opportunity to take some of the stress out of their employees’ end-of-year spending. Got some extra cash sitting in that FSA on December 31st? No problem—the new rule says you may be able to roll it over to next year.

This is good news for the 33 million Americans who use FSAs to funnel pre-tax dollars toward healthcare expenses, including those that might otherwise not be covered by insurance. It’s an efficient way to both reduce your taxable income (and therefore reduce your income tax) while paying for healthcare costs, but for many people it comes with a puzzle: how do you predict how much you’re going to need for healthcare expenses for the whole year? Overestimating that number has cost many employees money at the end-of-the-year rush to submit claims.

The changes in the “Use or Lose” rule aims to help minimize the chance of losing out in January. But before you rush out to change next year’s election to the maximum, make sure to read the fine print:

  • The new rule says that employers who don’t already offer a grace period for FSAs can grant a $500 maximum “rollover” so the balance in your account isn’t lost if you forget or are unable to spend it all.
  • Notice we said that employers can offer the rollover benefit. They don’t have to—and if they do, they may not offer the full $500 maximum. Check with your employer’s 2014 rules before you make any decisions to alter the size of your FSA.
  •  Your rollover amount does not count toward your yearly FSA allowance. (For example, let’s say you rollover the remaining $300 in your account—you don’t have to reduce next year’s election to $2200 from the $2500 maximum. The extra will simply add on, allowing you to spend $2800 next year.)

Employers who are interested in offering the rollover option to plan members have until the end of the plan year to amend their cafeteria plans. A special transition rule is in place to allow employers until 2014 to amend this year’s plans.