I thought health Flex Spending Accounts (FSAs) had a use-or-lose rule on contributions employees make into their accounts. Is that still true?
Yes and yes, but not entirely yes with regard to the latter.
Historically, Section 125 cafeteria plans which included an FSA for employees to contribute tax-free money in each plan year for the purposes of using those funds to pay for qualified medical expenses have had a use-or-lose feature. Under this rule, at the end of the time period in which to seek reimbursement for unused funds in the FSA, whatever remained in the account was forfeit by the employee. In 2005, the IRS amended the use-or-lose rule slightly by adding a grace period feature. Since this amendment, employers have been able to draft plans which allowed employees a grace period of up to two months and fifteen days beyond the expiration of the plan year in which to spend their money. Procrastinators cheered.
In late 2013 the IRS modified the use-or-lose rule further. Employers now have the option of amending their health care FSA plans to allow employees to carry over up to $500 of their allocated and unused funds from one plan year to the next, but only if the plan does not allow for the grace period expansion. In essence, employees can now have up to $3,000 to spend in future plan years on qualified medical expenses, if the plan allows for the rollover of up to $500. Employers do not have to allow for the grace period to the carryover feature, but it is another option available to mitigate the penalties to employees who fail to fully use their funds to their FSA for the plan year.
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