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FSA Developments

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Last week, the U.S. Department of the Treasury modified its “use it or lose it” rule to allow employees to roll over up to $500 of unused funds in their flexible spending accounts (FSAs) from one year to the next. SHRM submitted comments to the agency in August 2012 supporting this change and has been a longtime legislative champion of allowing FSA amounts to carry over from one year to the next.

Since their creation in the 1970s, FSAs have employed a “use it or lose it” rule, and employers were not allowed to return unspent funds to a participating employee. As consequence of this rule, many employees found themselves seeking qualified end-of-year purchases in a last-minute attempt to spend their health care dollars before they were forfeited.

SHRM’s comments expressed support for allowing unused funds to roll over, pointing out that the existing practice does nothing to encourage rational health care spending and that it sent “a message to participants to go spend money indiscriminately before [they] lose it.” The need to support wise FSA spending habits is especially important in light of the $2,500 deferral limits for FSAs set by the Affordable Care Act.

Current rules allow employers to offer a two-and-a-half month grace period, allowing employees to spend additional funds for a limited time after January. Under the revised rule, employers may offer a grace period or the end-of-year rollover but not both.

For more information on this topic, visit SHRM’s Express Request service and select FSA “Use It or Lose It” Rule Relaxed in the “Benefits” section. To review a copy of SHRM’s comments to the Internal Revenue Service on FSA rollovers, please click HERE.

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