FSA use-it-or-lose-it rule amended; will benefit's usage explode?

Business groups and employer advocates applauded after the IRS issued notice on Thursday that up to $500 in Flexible Spending Accounts can be carried over, starting with the period from 2013 to 2014. On December 31 of this year, use-it-or-lose-it will only apply to dollars 501 and above.

If open enrollment materials have already been finalized for 2014, it’s too late to communicate the change for 2013 funds. The $500, however, does not lower the annual $2,500 FSA limit, so up to $3,000 may be available in the following plan year. The old two-and-a-half-month grace period still applies.

Helen Darling, president of the National Business Group on Health, calls this “great news for millions of U.S. workers and their families,” and Joe Jackson, CEO of WageWorks, says benefits administrators should “encourage all eligible employees to take advantage of this change” and use their pre-tax dollars to pay for out-of-pocket health care expenses.

“Our appreciation goes to the Treasury [Department] for taking this important step to change the rule and mark an end to the ‘Use It or Lose It’ provision, allowing millions of middle class Americans to better and more cost-effectively manage their healthcare expenses,” Jackson says. “This rule change eliminates the perceived risk of losing money when employees consider signing up for an FSA. The timing of this change could not be better, as most companies are now in their open enrollment period.”

More than 85% of large employers currently offer FSAs, according to Alegeus Technologies, but only 20% to 22% of workers who could sign up for one do so, and fear of forfeiting unused funds at the end of the calendar year has been cited as one of the principal reasons health plan participants either don’t get an FSA or underfund it. One in four FSA participants suffers such a forfeiture each year.

Bob Natt, executive chairman of Alegeus, says “This policy development is fantastic news for everyone involved with FSAs – but especially for participants themselves.” He thinks this change will “certainly lead to growth” in FSA adoption.

“We greatly appreciate the administration’s leadership in putting forward this important policy that will benefit employers, employees and their families, by giving them greater control and choices in their health care planning,” Natt says. “With this new provision in effect, there is really no reason for eligible employees not to enroll and contribute to an FSA – all contributions are tax-free, the employee’s full election is available on the first day of the plan year, and now unused funds up to $500 can be rolled over to the next plan year.”

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