For nearly 30 years, any money left over in that account has been forfeited. But the U.S. Treasury and the Internal Revenue Service announced Thursday a modification of the “use-it-or-lose-it” rule. Employees now will be able to carry over as much as $500 in the account into the next year. Employers, though, must adopt this change by altering their policies.
Flexible Spending Accounts (FSAs) allow workers to set aside pretax income in an account to pay for qualified medical expenses. To prevent workers from using these accounts to accumulate large amounts of nontaxed cash, employees were required to spend the money by the end of the year or lose it. This often led to a mad dash to doctors’ offices or drugstores in December.
Several years ago, the government loosened the rules to give workers an extra 2.5 months to spend any unused money in the account. It was up to the employer whether to adopt this grace period.
But Treasury and the IRS reviewed the use-it-or-lose-it rule after the Affordable Care Act this year capped the amount employees can set aside in flexible spending accounts to no more than $2,500. This limit prevents employees from hoarding large sums in these accounts.
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The rule is “a step forward for hardworking Americans who wisely plan for health-care expenses for the coming year,” Treasury Secretary Jake Lew said Thursday.
The rule allows FSAs to have either a grace period or a carry-over, though not both.
“No longer is there a fear going forward that you could lose the money at the end of the year,” said Joe Jackson, chief executive officer at WageWorks, which administers benefit accounts for employers. “The biggest deterrent has been the use-it-or-lose-it proposition.”
About 35 million Americans use FSAs, he said.
“This was a good decision by the Treasury Department,” Sen. Orrin Hatch, R-Utah, said in a statement.
The Baltimore Sun and Bloomberg News is included
in this report.