The U.S. Department of the Treasury recently issued a notice modifying the longstanding “use-or-lose” rule for health flexible spending arrangements (FSAs). 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. The modification was made in response to comments received pointing to the difficulty 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.
Until the modification, any account balances remaining unused at the end of the year were forfeited by employees. Under current law, plan sponsors have the option of allowing employees a grace period permitting them to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to two and a half months following year-end. The new rules give employers the option to allow employees to carry over up to $500 of the unused amounts left in their health FSAs for expenses in the next year. The existing option for plan sponsors to allow employees a grace period after the end of the plan year remains in place. However, a health FSA cannot have both a carryover and a grace period; it can have one or the other or neither. For this reason, employers cannot offer a grace period on the same plan year that it offers the carryover provision. So, employers may continue to allow the use of funds for up to two-and-a-half months after the end of the plan year or allow employees to carry over up to $500 of unused funds, but not both. It is ultimately the employer’s choice to provide either option, or no option at all.
The treasury department has posted a Fact Sheet on its website that can be shared with employees.