Health flexible spending accounts (FSAs) are about get a bit more flexible. New federal guidance is to permit employers to let workers carry over unused amounts of up to $500 for expenses in the next year while still contributing up to $2,500 a year.
As you know, FSAs are voluntary account-based plans that help millions of Americans use pretax dollars to pay for eligible out-of-pocket health care expenses like prescription drugs, co-pays, and vision and dental costs. Unfortunately, you can’t yet use these pre-tax dollars at a “cash-only” clinic. That said, this is still positive health care news and definitely worth sharing.
Employees typically fund their FSAs, but companies can also make contributions. But for 30 years or so, eligible employees were subject to the use-or-lose rule, which meant that leftover account balances were forfeited, likely to the employer.
About 14 million American families use health FSAs, and the use-it-or-lose-it rule has been dinged as the biggest deterrent to signing up for an account.
- Effective in plan year 2014, employers offering 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 offering FSA programs not including 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.
Wait, grace period?
According to the Society for Human Resource Management, “Under current law, plan sponsors have the option of allowing employees a grace period of up to two and a half months after the year ends to use remaining funds for qualified FSA expenses.
“Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013, according to the notice. In addition, plan sponsors may continue to give employees a grace period.“
However, a health FSA can’t offer both options. It’s one or the other – grace period or rollover, not both.
This is not the only adjustment to FSAs recently. As of January 2013, the Affordable Care Act put a cap on FSA contributions at $2,500 and excluded over-the-counter medications as reimbursable expenses (unless a doctor’s prescription is provided).
So now I don’t have to rush to spend my FSA, right?
Yes, the change was made to “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 CEO, Joe Jackson. “Employers, employees and their families now have more control and flexibility in managing their out-of-pocket health care expenses.”
Wait, what about those HSAs?
The guidance makes no changes to health savings accounts (HSAs), which have always allowed participants to roll over any unspent funds from year to year. However, unlike an FSA, an HSA has to be linked to a high-deductible health plan. (In 2013 and 2014, deductible minimums were $1,250 for individuals and $2,500 for families).
Also, it’s worth noting that an insured individual may not have both an HSA and a health FSA. However, they may hold an HSA and a “limited-use” FSA that only covers dental and vision expenses. In this situation, the direct benefits don’t even come into play.