Flexible Spending Account Changes

Flexible Spending Accounts (FSAs) have been around for about 30 years. These accounts, when supported by an employer, allow employees to stash money in the account pretax. That is, the employee's taxable income is reduced by the amount redirected to their account. This lowers their income taxes. The employee had to make an irrevocable decision generally around November for how much to divert the following year.

When the employee has out-of-pocket medical expenses (i.e., expenses not covered by insurance) they can submit receipts and get reimbursed from the account. Thus the employee is able to pay for medical expenses with pretax dollars. One especially nice feature is that if there are significant expenses early in the year, the employee can obtain reimbursement from the account before they put their own money into it. In other words, they do not need to first accumulate a sufficient balance. (If they terminate employment during the year the employer can withhold from their final pay check to cover any shortage.)

One of the problems with an FSA is its "use it or lose it" rule. Initially any amount still remaining in the account at the end of the year was simply forfeited. This means one must be very conservative in estimating what their out-of-pocket expenses might be the following year. To improve that situation, some years ago the rules were changed allowing employers to offer a grace period. This allowed money left over to be used in the first two and a half months of the following year (i.e., until March 15). This helped a lot. During the open enrollment period if an employee had considerable fund left, they would simply estimate lower for the following year and then first use the carry-over funds during the grace period.

Today it was announced that employers have a new option: They can now allow up to $500 of residual funds to simply be carried over. The two and a half months of the grace period does not apply. This will, for most employees, be much better.

If an employer chooses to allow the carry-over provision then they can no longer offer the grace period. Either feature can be included in the plan, but not both. It is up to the employer to modify their plan documentation to offer either provision before employees can enjoy the benefit.