A few months back, we went over the basics on flexible spending accounts (FSA’s).
When used properly, FSA’s allow you to set aside pre-tax contributions that can be used – tax free – for medical expenses ranging from co-pays, to prescriptions, eyeglasses and more.
But there’s always been one big downside to FSA’s – you can’t carry over funds from one year to the next. You actually lose them altogether. For example, if you contributed $1,000 to an FSA in this year and spent $700 of it during the year, you’d lose the other $300 that went unspent.
This was dis-affectionately dubbed the “use-or-lose-it” rule. And the funds you lose actually end up getting eaten up by your employer in to an FSA slush fund of sorts. Bummer, right? The “use-or-lose-it” rule has dissuaded many people from contributing to FSA’s at all. One thing worse than medical expenses (which suck pretty bad in their own right) is seeing money you’ve earned and set aside for medical expenses taken away by your employer because you couldn’t spend it in time.
To encourage more participation, a few years ago, the IRS began allowing a grace period of up to 2 months and 15 days in which funds from the previous year could be spent in the following year.
Still, people were turned off.
Back in that basics article, I mentioned that the IRS was re-evaluating the “use it or lose it” rule. And it turns out that they have since made a ruling on it. They didn’t get rid of it altogether, unfortunately, but that was an unrealistic dream (lots of tax revenue potentially lost).
Now, employer plans are permitted to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year in to the next year.
This means that if, for example, you contribute $1,000 in 2019 and spend $500 during 2019 on qualified medical expenses, the unspent $500 would roll over in to 2020.
FSA Carryover Rule Q & A
This is a big change. I’m expecting a lot of questions on this new rule, because it is not the most intuitive, yet it suddenly makes FSA’s much more appealing to a lot of people – so I researched some expected questions and found answers:
Q: Is my employer required to offer the $500 carryover?
A: No. Employers are not required to adopt this rule, just like they were not required to adopt the grace period rule. In other words, while it was not legal for employers to create their own carry-over rule prior to now, it is now allowed, but not required.
Q: What year does this take effect?
A: This is already in effect. During open enrollment season, check with your HR department if you’re wondering about this.
Q: Can a FSA have both a grace period and the carryover?
A: No. A flexible spending account cannot have both a carryover and a grace period: it can have one or the other or neither, at the employer’s discretion.
Q: Do carried over funds count against the maximum FSA contribution for that year?
A: The $500 carryover also does not impact the $2,700 indexed maximum FSA contribution. In other words, you could roll over $500 and still contribute the indexed maximum for that year (maximums per employer plan do vary and could be less than $2,700, but $2,700 is the absolute maximum allowed for 2019).
Q: Will the $500 carry over more than one year? In other words, if I have $500 roll over to 2019, spend $0 in 2019, will the $500 roll over to 2020? 2021?
A: Per the IRS guidance, this is allowed. However, your plan might have differing rules.
If you want all the dirty details and see some examples, here is the IRS FSA carryover rule documentation.
FSA Carryover Discussion:
- Will this new rule ease your concerns on contributing to an FSA? Or maybe even contribute for the first time?
- How much will you be contributing to your FSA before/after the rollover rule (if used by your employer)?