The IRS issued a notice on October 31 modifying the long-standing “use-or-lose” rule that applies to health flexible spending arrangements (“Health FSAs”).  The new rule permits participants to apply up to $500 of unused Health FSA contributions to pay for expenses incurred in the next plan year, if the employer amends its Health FSA to permit such carryovers.  Although plan sponsors are not required to offer the carryover, for the first time in 30 years, they have the option to do so.

Participants in Health FSAs may contribute up to $2,500 per year (indexed) to a Health FSA on a pre-tax basis to pay for medical expenses not otherwise covered by an employer’s health plan.  Health FSAs come at a price, however — generally, unused amounts contributed to a Health FSAs must be forfeited at the end of the year and cannot be carried over to a future year or cashed out.  The IRS modified this rule in 2005, permitting plans to adopt a “grace period” that allows a participant to use contributions made in one year to pay for medical expenses incurred during the first 2 ½ months of the next year.

In response to public comments, and in particular the concern that the forfeiture requirement was discouraging lower paid employees from making Health FSA contributions, the IRS has now added another option for employers — they may amend their Health FSA plans to permit employees to carry over $500 in contributions from year 1 to pay year 2 medical expenses.  Employers are not required to permit carryovers, and may specify a carryover amount of less than $500.Continue Reading Changes to the “Use-Or-Lose” Rule Add Flexibility to Health FSAs