Treasury Modifies FSA "Use-It-or-Lose-It" Rule

by Michael on Oct 31, 2013 · 1 comment

Photo of U.S. Treasury Seal on Dollar Bill

A reader named Chris just let me know that the U.S. Treasury has modified the “use-it-or-lose-it” rule relating to FSAs.

In the past, when you had unspent funds left in your Flexible Spending Account at the end of the year, you lost them to your employer.

Yes, your employer already had the option of providing you with a grace period into the early part of the next year, but… Your money was still at risk of forfeiture once the grace period lapsed.

As you may (or may not) recall, the IRS and Treasury Department asked for comments related to a possible modification of this rule back in the summer of 2012. Well, it seems that people spoke — and they listened.

From the today’s press release:

“To make health FSAs more consumer-friendly and provide added flexibility, the updated guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year.

[...]

Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013. In addition, the existing option for plan sponsors to allow employees a grace period after the end of the plan year remains in place.”

They go on to state that employers will not be allowed to provide both a grace period and carryover. Rather, plans can have one or the other — or neither. Also note that this change applies to health and not dependent-care FSAs.

Note: There’s a difference between FSAs and HSAs. You’ve always been able to carry over your full HSA balance. In fact, some of us use like to leave the money in our HSAs and use them like an extra retirement account.

In my view, this is definitely a step in the right direction, though I would have preferred to see them go further. If the goal is to prevent people from stockpiling cash in an FSA, they could (for example) still allow full carryover and just reduce your allowable limit for the next year by the same amount.

Source: Treasury.gov


{ 1 comment… read it below or add one }

1 krantcents November 1, 2013 at 7:20 pm

I love this new provision! I have had a FSA for 12 years and I always underestimate my usage because of the use it or lose provision. Now i can transfer any leftover to the next year.

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