Understanding the New Health FSA Carryover Option

LWIInsurance-300x225FSAs (Flexible Spending Arrangements) have been a valuable part of US health plans since their inception.  The ability to use pre-tax money to pay for medical expenses has helped US citizens to make the most of their healthcare budget.

Unfortunately, one of the primary downsides to this helpful benefits program has been the limit on the length of time available to make use of money invested or stored in them (any unused amounts left in participant’s FSA plan had to be used within the specified 12 month duration or be forfeit).  Many believe this “use it or lose it” policy prohibited some from participating in their companies’ Health Care Flexible Spending Arrangement programs.

While there was an allowance for companies to amend employee FSA plans to provide for an additional 2.5 month grace period during which individuals could continue to draw from the entire remaining prior year balance to cover additional medical expenses, that grace period failed to provide as much relief or assistance as some would have preferred.

For those who have been taking advantage of FSAs, there good news. In October 2013, the Treasury department modified the “use it or lose it” rule for these programs to allow for another exception.  Under the new health FSA Carryover Option rule, employers can now allow their FSA plan participants to carry over a maximum of $500 in FSA plan amounts to the New Year, an amount which it no longer limited to the first 2.5 months of the carryover year.

By allowing for an additional 12 months, the program has effectively increased the usefulness of FSAs and removed some of the frustration and issues that previous participants had expressed.  Considering these generous program changes, these allowances should ultimately encourage increased participation and help to lessen the ever-increasing healthcare burden being placed upon both individuals and families.

Individuals and employers should note that this maximum $500 carryover amount doesn’t count against the maximum payroll contribution allowance of $2,500 for the following year.  Additionally, everyone should be aware that this new rule involves and either/or choice – either employers/participants can use the previous 2.5 month grace period, or they can use the 12 month carryover exception.

If employers adopt the carryover rule, their individual allowances must be the same for all plan participants (any uniform amount or $500 or less).

In order to implement the carryover rule, employers must contact their plan administrator on or before the last day of the plan year, and request that the changes be made retroactively to the first day of that particular plan year.

When choosing between the grace period and carryover options, employers and participants should weigh the key differences – the grace period has no max on carryover amount but a 2.5 month time limit while the carryover has a $500 carryover amount max but an additional 12 month time limit.

If you have questions about the new FSA options and/or how to implement them for your company, contact Lescault and Walderman at 866-496-2042.

Stay in the loop

Subscribe to our free newsletter.