FSA’s Use-It-Or-Lose-It Rule Eased

Flexible spending accounts, or FSAs, allow employees to contribute a portion of their wages that can be used to pay for medical expenses not covered by insurance. The amount contributed to the FSA is not taxed as compensation. The maximum elective deferral for 2013 and 2014 is $2,500; it can only be made if an employer has set up a medical FSA for employees.

Until now, one of the drawbacks to FSAs was the use-it-or-lose-it rule, which meant that any contributions not used up in the current year, or during a grace period, were lost forever. Now the IRS has modified this rule. An employer can change the plan to allow a carryover of up to $500. This change can be made to the 2013 plan. Having a carryover has no impact on the elective deferral for the carryover year. Thus, if your plan permits it and you have a $500 carryover to 2014, you can still make a $2,500 deferral election, giving you $3,000 to use for unreimbursed medical expenses in 2014. For future years, the carryover is limited to the lesser of the unused amount for the current year or $500 (or a lesser amount allowed by the plan).

If a plan adds this carryover option, no grace period is allowed. If you are currently in a medical FSA, check with the plan administrator to learn whether you are eligible for a carryover or a grace period. Note that any unused amount usually is forfeited when you leave the job.

Source: Notice 2013-71