Econintersect: The IRS has issued a new ruling which will allow a small rollover from one plan year to the next for Flexible Spending Accounts (FSAs). These are accounts that receive pre-tax funding from an employer that can be used for any eligible medical expense, but is designed to be most efficient if used for reimbursement of deductions under a health insurance plan. It has been tradionally a “use it or lose it” plan, with no rollovers to future years. These rules were modified in 2005 and again this month with IRS Notice-2013-71.
Under the new ruling up to $500 can rolled forward and added to the account availble for spending in the following year. The 2005 ruling had established a two month 15 day extension at the beginning of any year in which unused FSA funds from the previous year could be spent. From now on employer plans can chose any one of: (1) the strict 12 month time limit, (2) the 2 1/2 month extension (grace period) or (3) the $500 rollover for the entire next year. But employers may only use one of the options.
The FSAs have sometimes been confused with Health Savings Accounts (HSAs). The essential features of HSAs and FSAs are described by WageWorks.com:
To be eligible to open and contribute to an HSA tax-free, you must first be enrolled in a high-deductible health plan (HDHP). The choice between an HSA and a Flexible Spending Account (FSA) really means deciding between an HDHP and a traditional health plan. The following are a few things to think about when considering whether to switch to an HDHP from a traditional plan.
The following table from WageWorks.com summarizes the comparison of FSAs with HSAs:
Two important details are not listed in the table above:
- Annual funding limits: $2,500 per year for FSAs and no limits for HSAs.
- Anyone can open an HSA provided they have a high deductible health insurance plan (at least $1,250 for an individual or $2,500 for a family). FSAs are only available for job based insurance plans that have the FSA provision.
Typically the HSAs have been used with very high deductible accounts (say $5,000) and the years with less medical expenses have unused balances accumulate for future use, which can include non-medical spending after age 65. The balances accumulated during a lifetime for an HSA could be significant for a healthy family. If there were $2,000 unused balances for 30 years and invested with 5% average growth, the account could reach $64,000.
The FSA, on the other hand, does not have an accumulation possible. The limit for an annual contribution is $2,500. If an FSA plan selects the new $500 rollover provision then one one year which has $2,000 or less of the funding used will rollover $500 to the following year. If year two is again under $2,000 disbursement $500 can be rolled over to year three, but the $500 rolled from year one to year two is lost (returned to employer).
To adopt the new provision, employers must modify the FSA plan document, including eliminating the grace period if that is in the existing plan.
- Modification of “Use-or-Lose” Rule For Health Flexible Spending Arrangements (FSAs) and Clarification Regarding 2013-2014 Non-Calendar Year Salary Reduction Elections Under § 125 Cafeteria Plans (IRS Notice 2013-71)
- Choose Between an FSA and an HSA (WageWorks.com)
- IRS eases FSA use-it-or-lose-it rule (Alison Bell, Life Health Pro, 31 October 2013)
- FAQs About Health Savings Accounts (Kiplinger)