Important Changes To FSA ‘Use It Or Lose It’ Rule

Photo Credit: Stock Monkeys

Photo Credit: Stock Monkeys

Do your employees wish FSAs were more flexible?  An update to FSAs this year may please employees currently taking advantage of flexible savings accounts and may have more employees opting in.  After reading this blog, you’ll know what to consider when deciding whether or not to implement this change.

Most people who have participated in an FSA are familiar with the “use it or lose it” rule.  The employee usually funds FSAs, although companies can contribute to the accounts as well.  If, at the end of the year, there is money left over in the FSA, it is forfeited and the money goes to the company (the “lose it” feature of the program).  To give employees more flexibility, the only option companies had was to offer a 2-month grace period for the employees to use up the funds, until now. 

Why choose an FSA?  It sort of sounds like a hassle and the prospect of forfeiting saved dollars at the end of the year isn’t too appealing.  However, the program is nice for employees with predictable medical expenses.  If they know their average prescription cost throughout the year, employees can set aside those dollars in the tax-free FSA.

More Flexibility – Since it is relatively annoying to hand over money you’ve earned, but set aside in a tax-free account because you didn’t spend it, in the past employees have solved this by stocking up on eyeglasses, contacts, and over-the-counter medications at the end of the year.  However, OTC meds are no longer eligible and one only needs so many pairs of glasses.  That’s why the IRS listened when they requested comments regarding possible changes to the year-end forfeiture of FSA dollars.

  • Effective for 2014 plan year – employers that offer FSAs to their employees now have the option to allow participants to roll over $500 of unused funds to the next year’s account balance.
  • Immediately effective – employers that don’t offer a grace period have the option of allowing employees who participate in the FSA to roll over up to $500 at the end of the 2013 plan year.

Employers still have a decision to make.  You cannot offer a rollover and a grace period.  One way to determine which is the best decision for your company would be to take a look at the average amount forfeited at the end of the year or the average amount of funds employees dedicate to an FSA.

Benefits administration is becoming more and more complicated.  Do you see a staffing need in your company for a benefits administration role?  Contact Serenity Staffing today and we’ll help you fill your staffing needs.  We’ll recruit, screen, and coordinate interviews.  The only thing you need to worry about is interviewing qualified candidates for your open positions.  Connect with us on Facebook and LinkedIn so you can stay up-to-date on the coming changes in the field of HR!