Flexible spending accounts have historically been less popular with Americans than health savings accounts
Flexible spending accounts have historically been less popular with Americans than health savings accounts, due to a “use it or lose it” provision that requires account holders to forfeit any unused balances at the end of their plan year. However, a new adjustment to FSAs that was announced in October by the Treasury Department and the IRS may change that.
The government agency recently modified the forfeiture rule, and will now allow individuals to carry over up to $500 of their remaining balances at the end of the plan year. The new tax lawis designed to generate greater interest in these tax-advantaged plans, allow workers to keep a greater portion of their balances, and reduce unnecessary medical spending at the end of the year, the Treasury Department said.
Existing rules also give employers the option of allowing employees a grace period that permits 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. While this rule will remain in place, plan participants may not employ both a carryover and a grace period. They must choose one or the other.
“Across the administration, we are always looking for ways to provide added flexibility and commonsense solutions to how people pay for their healthcare,” said Treasury Secretary Jacob Lew. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”
According to the agency, roughly 14 million Americans participate in FSAs, and analysts are eager to see if the change will prompt an increase in participants. This is currently unclear, because employers are not required to adopt the new benefit and may continue with existing forfeiture rules if they wish. A large number of employers currently offer FSAs as a method of providing assistance to workers in covering qualifying out-of-pocket medical expenses, while also earning valuable tax breaks for the company.
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