Change in Use-It or-Lose It Rule for Health Flexible Spending Accounts (FSAs)

The IRS has changed its rules regarding the use of funds set aside in a health care flexible spending account (FSA), also known as flexible spending arrangement. Until now, employees forfeited any funds not used up by the end of the plan year (or end of the grace period, if applicable), under what is sometimes referred to as a "use or lose" provision.

Companies that offer FSAs may now allow employees to carry over $500 of unused funds in a health care FSA to be used the following year. Carrying over $500 doesn’t affect the $2,500 per year maximum (that is, employees can use $2,500 from the current plan year plus the $500 rollover from the previous plan year). Employees can roll over a total of $500 from year to year (that is, they can’t save up $500 each year and keep rolling it over).

Only FSA plans without a grace period are eligible. (A grace period is when the company allows the employees to use funds up until March 15 following the end of the plan year.) In contrast, FSA plans with a “run-out” period are eligible. A run out period is a period of time following the end of the plan year during which employees can submit receipts for money spent on health care expenses during the plan year.

Companies have the option to apply this change to the 2013 plan year or wait until the 2014 FSA year to implement it. Companies may also decide to allow a lesser amount to be carried over (for example, $250), or may not allow a carry over at all. A company that doesn’t allow a carryover gets to retain any funds that are not spent by its employees.

This change does not apply to dependent care accounts.