IRS Modify Flexible Spending Accounts

Millions of Americans use flexible spending accounts (FSA) to pay for their healthcare. Flexible spending accounts have been around for over thirty years, and the ‘use it or lose it’ rule has left users scrambling at the end of the year to spend all the left over money remaining in their account. At the end of October, the IRS announced that they are going to be more flexible with the FSAs. The modification allows employees to carry over up to $500 in unused account balances. This will have many Americans breathing a sigh of relief in the last few months of this year.

The IRS and the Department of the Treasury made the decision to allow rollover for FSA accounts to cut back on wasteful spending. This decision came more than a year after the Treasury and IRS announced plans to change the 29-year-old rule that forces participants to use their balance or forfeit the unused balance. The current rule also offers the employer the choice to extend a 2½-month grace period. At the end of the grace period the participant would then lose the unused portion of the savings.

With the modified rule, the employers will have two options, the $500 rollover or the 2½-month grace period. Both are intended to reduce the amount of wasteful spending incurred with the end of the year. The only stipulations, the employer must choose either the rollover option or the grace period. Millions welcome the great news of the change to the ‘use it or lose it’ rule. The Treasury Department estimated that 14 million families will now participate in health care FSA given the changes in policy.