Workers may no longer have to stock up on medications or glasses just to use up money in flexible spending accounts before the end of the year, under a federal rule change.
For years, any money left over in a flexible spending account has been forfeited. But the U.S. Treasury and the Internal Revenue Service announced last week a modification of the “use-it-or-lose-it” rule. Employees now will be able to carry over as much as $500 in the account into the next year. Employers, though, must adopt this change by altering their policies.
Flexible spending accounts allow workers to set aside pre-tax income in an account to pay for qualified medical expenses. To prevent workers from using these accounts to accumulate large amounts of non-taxed cash, employees were required to spend the money by the end of the year or lose it. This often led to a mad dash to doctors’ offices or drugstores in December.
Several years ago, the government loosened the rules to give workers an extra 2.5 months to spend any unused money in the account. It was up to the employer whether to adopt this grace period.
But Treasury and the IRS reviewed the use-it-or-lose-it rule after the Affordable Care Act this year capped the amount employees can set aside in flexible spending accounts to no more than $2,500. This limit prevents employees from hoarding large sums in these accounts.