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Employees now have the ability to carry over up to $500 in unused funds into the next plan year
The changes in Flexible Spending Account (FSA) rules are expected to impact employee participation in FSAs and spending on medical costs, according to industry experts.
In October 31, 2013, the IRS issued a modification to the “Use or Lose” provision. Previously, all funds in an FSA had to be used by the end of the plan year or they would be forfeited. With the October 2013 modification, employers were given the option of offering their employees the ability to Carry Over up to $500 in unused funds into the next plan year. If an employer offers a grace period-which allows employees to Carry Over funds for a specified amount of time into the following plan year, not exceeding 2 and a half months-the grace period must be eliminated before a Carry Over can be allowed. A plan cannot offer both options.
“The greatest deterrent for FSA enrollment has been the ‘Use or Lose’ rule,” says Renee Lutzen, Senior Director of Healthcare at Visa Inc. “The IRS modification of the rule is expected to result in increased FSA participation which will allow more employees to participate in the management of their healthcare spend without the fear of forfeiting up to $500 of their contributed monies, which they set aside specifically for healthcare costs.”
In addition to ensuring both employers and employees-if their employer selects a Carry Over option-are aware of the Carry Over option, managed care executives that are involved in administering benefits for employers/plans that include FSAs should ensure:
“Consideration also needs to be given to how the Carry Over is handled in the event the employee moves to a tax-advantaged health savings plan,” Lutzen says. “Because a FSA is considered a health plan, only limited use FSAs-typically covering dental and vision-may be used with an HSA.”
The modification to allow a Carry Over is perceived as beneficial to the employee and the employer.
For the employee:
For the employer: