IRS Adds an Attractive Option to Flexible Spending Accounts
The IRS recently added new meaning to the term “flexible” when it comes to flexible spending accounts. This once rigidly controlled plan loosened up a few years ago. Now the IRS has added a new option, allowing the carryover of some unused funds. At first glance this may seem like a no-brainer choice, but it does come with a catch you need to be aware of. Keep reading for details.
IRS Adds an Attractive Option to Flexible Spending Accounts
Background: Ever since cafeteria plans, also called Section 125 plans, became available in 1978, employers have complained about the rigidity of these plans. Specifically, they were troubled by the fact that, when employees did not use all of the funds in their accounts by the end of the year, those funds had to be forfeited. The main concerns have been:
The restriction discourages participation, particularly among lower paid workers who could not abide the thought of throwing away hard-earned money if they failed to drain their health flexible spending accounts (FSAs) by the end of the year,
To avoid forfeiting their unused funds, employees rushed to incur unnecessary health services at the end of the year.
Plan administration could be simplified by easing the restriction.
Later, when health savings accounts became available, FSAs lost some of their appeal. This is because health savings accounts, in conjunction with high-deductible health plans, allow for long-term accumulation of savings for health expenditures, a feature which many employers found attractive.
Grace Period Option
In 2005, the IRS relented to these critics by allowing for a 2-1/2-month “grace period” after the end of the plan year, when employees could use up remaining FSA funds. For employers who made the election to allow the grace period, this added flexibility was welcome. Now, in another positive change, participants in FSA accounts will be able to carryover $500 of FSA funds, to the following year. This is effective currently, for 2013, but the carryover is not automatic, it must be elected.
