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Changes to FSA Use It or Lose It Rules

By on March 6, 2014 in Health Insurance, Insurance

Changes to FSA Use It or Lose It RulesThere are a myriad of savings accounts available that are associated with healthcare spending. And there are a myriad of rules and regulations associated with each of those accounts.

We’ve got HSAs, FSAs, and HRAs. We’ve got tax-deductibility, accounts that rollover your money to the next year, accounts that require you to spend all the money by the end of the plan year, and accounts where the money isn’t yours until you have a reimbursable healthcare expense.

Up until now one of the worst accounts has been the Flexible Spending Account. It’s not that having a FSA is a bad thing – you do still have the option of setting aside money pre-tax for healthcare spending – but compared to some of the other options available the FSA hasn’t been as great.

The main reason?

“Use it or lose it.”

The Use It or Lose It rule for flexible spending accounts meant that by the end of the plan year you would have to spend every dollar in the account or forfeit it to the plan.

It’s a horrible rule. If you had $2,000 left in the account at the end of the year you ended up scrambling trying to find a way to spend the money in the allowable healthcare expense categories. If you couldn’t find a way to spend it all you would forfeit it to the FSA plan.

So your hard earned dollars that you set aside for healthcare spending gets to be enjoyed by the company administering your account.

Unbelievable.

Now the US Treasury has issued a fix for this rule… sort of.

“Use It Or Lose It” Becomes “Use It Or Lose Most of It”

The new Treasury rule is that you can rollover up to $500 of your flexible spending account dollars to the next plan year without losing it. Since you can contribute $2,500 as a maximum that still means you could have $2,000 at risk if you never needed to spend the money that year.

However, the Treasury says data shows that most of the money that is forfeited is less than $500 per account, so in theory this should cover most situations. (Of course the most logical rule would be allowing a rollover of the full amount like an HSA, but I digress.

There are Two Catches

As nice as this rule change is, there are some catches.

First, your employer has to allow this with your FSA. It would seem like a no-brainer, but there’s no guarantee they make the change. And yes, the change can be made for the current plan year.

The other catch is for employers that offer a “grace period” of two and a half months after the end of the plan year where you can spend last year’s money before forfeiting it. (This would give you until the middle of March of the next year to spend the money.)

However, if your employer currently offers the grace period it cannot offer the $500 rollover. It’s an either/or proposition. Employers can change the rules to allow a $500 rollover, but in return they forfeit the 2.5 month grace period at the end of the plan year.

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