In the 4th quarter of 2013, an important rule changed that will benefit employees who have FSAs, and should make them even more popular in 2014.
In the past, small business owners and their employees may have shied away from Flexible Spending Accounts (FSAs) due to the “use it or lose it” policy. Although FSAs permitted valuable tax-free savings to be used to pay qualified health care expenses, employees had to guess correctly, at the beginning of the year, about how much they should put into their accounts. Many avoided FSAs because they were nervous about forfeiting whatever they didn’t spend by years end. Until now, fewer than twenty-five percent of U.S. workers have FSAs and nearly a third of those lost some money at the end of the year.
In October, after nearly 30 years of the FSA program, the U.S. Department of Treasury and the IRS issued a notice modifying this longstanding “use it or lose it” rule, expanding its 75 day grace period to a second option of a full year. To make FSAs more consumer friendly and to provide added flexibility, the updated guidelines permit employers to allow plan participants to carryover up to $500 of their unused balances, to pay for qualified FSA expenses, into the next year. With the new modification, employers can choose either to keep the previous structure, or they can choose to permit employees to carry-over up to $500 of unused funds. However, a company cannot have both a carryover and a grace period; it can have one or the other, based on the employer’s preference.
Should your company opt for the new annual program, make sure your employees understand the new ruling and how it benefits them, at no cost to your company. With the adjustment to the “use it or lose it” rule, employees are likely to find Flexible Spending Accounts more attractive and more will participate in this valuable tax free way to pay for health care.