Carryover of Up to $500 Provides Greater Flexibility to Plan Participants
WASHINGTON – The U.S. Department of the Treasury and
the IRS today issued a notice modifying the longstanding “use-or-lose” rule for
health flexible spending arrangements (FSAs). To make health FSAs more
consumer-friendly and provide added flexibility, the updated guidance permits
employers to allow plan participants to carry over up to $500 of their unused
health FSA balances remaining at the end of a plan year.
“Across the administration, we are always looking for ways
to provide added flexibility and commonsense solutions to how people pay for
their healthcare,” said Secretary Jacob J. Lew. “Today’s announcement is a step
forward for hardworking Americans who wisely plan for health care expenses for
the coming year.”
Today’s action directly responds to public comments invited
by the Treasury Department and the IRS. An overwhelming majority of
feedback from individuals, employers, and others requested that the use-or-lose
rule for health FSAs be modified. Comments pointed to the difficulty for
employees of predicting future needs for medical expenditures, the need to make
FSAs accessible to employees of all income levels, and the desire to minimize
incentives for unnecessary spending at the end of the year.
For nearly 30 years, employees eligible for health FSAs have
been subject to the use-or-lose rule, meaning that any account balances
remaining unused at the end of the year are forfeited. An estimated 14
million families participate in health FSAs. Under current law, plan
sponsors have the option of allowing employees a grace period permitting them
to use amounts remaining unused at the end of a year to pay qualified FSA
expenses incurred for up to two and a half months following year-end.
Today’s guidance permits employers to now allow employees to
carry over up to $500 of the unused amounts left in their health FSAs for
expenses in the next year. Some plan sponsors may be eligible to take
advantage of the option to adopt a carryover provision as early as plan year
2013. 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.
Read the modification notice.
Read the fact sheet on the health FSA and this notice.