The IRS released new guidance recently (10/31/2013) modifying the longstanding “use it or lose it” rule for Health Flexible Spending Accounts (FSAs). For nearly thirty years, employees eligible for FSAs have been subject to the rule resulting in a loss of approximately 4 percent of all dollars put into the accounts. Effective immediately, taxpayers with FSA not including a grace period will be allowed to carryover up to $500 of their unspent FSA funds to the following plan year.
This announcement comes at an important time of the year, as you can now encourage all employees during your open enrollment meetings to elect a Health FSA of at least $500 without worry of losing it. The Treasury and businesses alike anticipate greater FSA participation in the upcoming year.
Flexible Spending Accounts allow employees to contribute pre-tax dollars into an account to pay for out-of-pocket health care costs such as deductibles, coinsurances, and other qualified medical, dental or vision costs not covered by their health insurance plan. There are very specific rules surrounding each firm’s plans, so employees will want to review their plan details to clarify covered expenses. Under the Patient Protection and Affordable Care Act, the amount an employee can set aside is $2,500 for the 2013 plan year. The $500 carryover won’t reduce the plan maximum for future years.
Below are the important details of the recent guidance:
· Effective in plan year 2014, employers that offer FSA programs will have the option of allowing participants to roll over up to $500 of unused funds at the end of the plan year.
- Effective immediately, employers that offer FSA programs that do not include a grace period will have the option of allowing employees to roll over up to $500 of unused funds at the end of the current 2013 plan year.
- This new ruling does not apply to other types of flexible spending cafeteria plans, such as HSA, HRA, Dependent Care or Parking and Transit FSA programs.
The use-it-or-lose-it rule left many Americans feeling skeptical about investing in FSA plans, especially those employees with low to medium paying jobs. In a survey of large employers, 86 percent offered FSAs for healthcare expenses, but only 23 percent of workers participated according to Mercer, a benefits consulting firm. Furthermore, average worker contribution to FSAs in 2012 was $1,484 and the percentage of overall dollars forfeited was 4 percent. U.S. Treasury officials are hoping that the new rules will encourage more participation in the plans, thereby providing even greater tax advantages for those needing them most.
Employers, however, have decisions of their own to make. They can elect to offer the original grace period, offer the carryover or to not participate in the new rules at all. Firms can decide whether or when they wish to make the change.
Potential major benefits of this new “rollover” provision include:
- Eliminating the most significant impediment to FSA adoption (i.e. use-it-or-lose-it provision) – creating significant upside for FSA adoption growth, which has been limited over the past several years;
- Enhancing healthcare options and offering greater funds protection for FSA participants, particularly lower and middle income workers who are highly concerned about cash flow;
- Minimizing risk for individuals with unpredictable healthcare expenses, such as those dealing with chronic conditions that may necessitate high-cost procedures/services with ambiguous timing or medical necessity;
- Curbing wasteful and potentially unnecessarily end-of-year spending by FSA participants seeking to avoid losing unused funds.
To learn more about FSAs and the new rollover provision and how it can impact your taxes and those of your employees, talk with a PASBA small business advisor. Finding a PASBA advisor is easy. Click Find an Accountant and enter your zip code. A listing of PASBA-affiliated small business professionals will be a click away.
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Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.
Copyright Information 2013 Professional Association of Small Business Accountants