Health flexible spending accounts (FSAs) are becoming more flexible. New federal guidance permits employers to allow workers to carry over unused amounts of up to $500 for expenses in the next year and still contribute up to $2,500 annually.
FSAs are voluntary account-based plans that enable millions of Americans to use pretax dollars to pay for eligible out-of-pocket health care expenses like prescription drugs, co-pays, and vision and dental costs. FSAs are often funded by employees, although companies can also make contributions. However, for nearly 30 years, employees eligible for health FSAs have been subject to the use-or-lose rule, meaning that any account balances left at the end of the year were forfeited, usually to the employer.
Although an estimated 14 million American families participate in health FSAs, the use-it-or-lose-it rule has often been identified as the biggest deterrent for those considering whether to sign up for an FSA.
In 2012, the U.S. Internal Revenue Service requested comments regarding possible modifications to the year-end forfeiture of FSA balances. However, the announced change—coming in the middle of the fall 2013 open-enrollment season—caught plan sponsors and the benefits community by surprise.
Cafeteria Plan Amendment Required
On Oct. 31, 2013, the U.S. Treasury Department and the IRS issued a notice and fact sheet announcing the change. According to the 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 workers to roll over up to $500 of unused funds at the end of the 2013 plan year. an analysis posted by benefits law firm Bryan Cave LLP.
In other words, employers can opt in to allow the $500 carryover for this year but would have to amend their plans, eliminating the grace period (if they offer one). Since open enrollment is already underway at many companies, amending plans and communicating these changes to employees during this year's open enrollment period could be challenging.
“Since it cannot coexist with the grace period in the same plan, plan sponsors will have to decide which feature is more beneficial to their participants,” according to Bryan Cave's posting. “For example, if most participants elect around $500 for the FSA, the carryover feature may be more beneficial than the grace period.”
Plan sponsors will have to decide
which feature—the carryover
or grace period—is more
beneficial to participants.
While the Bryan Cave analysis notes that “a health FSA can have this carryover feature,” but “the carryover feature does not apply to other kinds of FSAs.” Joe Jackson, CEO of benefits administration firm WageWorks, clarified to SHRM Online that
the $500 carryover amount “can be applied to any health care FSA, including a limited purpose FSA that may complement a health savings account (HSA).” It does not, however, apply to dependent care FSAs.
The guidance isn’t the only recent change to FSAs. As of January 2013, the Affordable Care Act capped FSA contributions at $2,500 and excluded over-the-counter medications as reimbursable expenses without a doctor’s prescription.
The new $500 carryover won’t reduce the $2,500 maximum a worker can contribute to an FSA each year, according to Treasury officials.
“As with the 2 ½ month grace period, this new carryover option is entirely optional on the part of a health FSA sponsor," an alert from law firm Spencer Fane noted. "A sponsor is also free to specify a maximum carryover amount of less than $500—so long as the cap applies equally to all employees. Sponsors who have relied on forfeitures to offset losses attributable to the ‘uniform coverage rule’” might consider a lower carryover cap as a way of minimizing the cost of this new option.”
Manage Employee Expectations
"Some employees may expect that they will have this feature automatically and as soon as 2013," cautioned Rich Stover, a principle at Buck Consultant. "Employee communications should happen sooner than later and fully explain how the carryover works. This will give employees the best opportunity to plan for their expenses.
Eliminating the Rush to Spend
The change should “eliminate the wasteful spending that takes place each year as employees rush to consume their remaining FSA dollars due to the use-it-or-lose-it rule,” said WageWorks' Jackson. “Employers, employees and their families now have more control and flexibility in managing their out-of-pocket health care expenses.”
The agencies’ action was in response to the public’s comments, which the Treasury and IRS solicited. “An overwhelming majority of feedback from individuals, employers and others requested that the use-or-lose rule for health FSAs be modified,” according to a Treasury statement. "Comments pointed to the difficulty for employees of predicting future needs for medical expenditures, the need to make FSAs accessible to employees of all income levels and the desire to minimize incentives for unnecessary spending at the end of the year."
The Society for Human Resource Management also submitted comments supporting the roll over of unused funds from an employee’s FSA at the end of the year. SHRM emphasized that allowing funds to roll over introduces consumerism into the FSA process, because employees will not feel they have to spend indiscriminately at the end of the year to avoid forfeiting their remaining money.
The guidance makes no changes to health savings accounts, which have always allowed participants to roll over all unspent funds from year to year. However, unlike an FSA, an HSA must be linked to a high-deductible health plan (in 2013 and 2014, deductible minimums were $1,250 for individuals and $2,500 for families). An insured individual may not have both an HSA and a health FSA but may hold an HSA and a “limited use” FSA restricted to covering dental and vision expenses.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
To read the original post on shrm.org, please click here.