If your employer offers health care flexible spending accounts, you may have a new option for managing the funds.
New rules could make using the money even more flexible.
Officially known as flexible spending arrangements, FSAs let you set aside some of your pay, pretax, to cover out-of-pocket health costs. Roughly two-thirds of employers offer them, according to a report from the Society for Human Resource Management.
It used to be that an unspent balance in an FSA had to be forfeited at the end of the year. Even though many employers allowed an additional grace period of two and a half months, the risk of losing the funds made some people wary of using the accounts.
Late last year, however, the federal government changed the rules, giving employers the option to allow as much as $500 to be carried over in an FSA from one year to the next.
That means you do not have to worry about losing the money if it is not all spent before the end of the year; no more rushing out to buy a new pair of eyeglasses that you don’t really need. Employers must choose between offering the carry-over option or a grace period to their workers – they cannot offer both.
WageWorks, which manages pretax worker benefits for about 29,000 employers, expects roughly half of its clients to adopt the carry-over provision, based on research it conducted with Visa.
“In reality, there isn’t a logical reason why an employer wouldn’t take advantage of the carry-over provision,” said Joe Jackson, the company’s chief executive. Some employers, mostly smaller ones, have adopted it for this year, he noted. Employees can feel comfortable putting at least $500 into their accounts, he said, without worrying that they will forfeit it.
Steven G. Auerbach, chief executive of Alegeus Technologies, which administers such accounts, advises employers that adopt the carry-over option to educate employees about the change. The company’s research indicates that many consumers remain confused about the details of FSAs and other tax-advantaged savings options, like health savings accounts or HSAs.
HSAs, for instance, also allow pretax money to be set aside for health expenses, but are available only to workers who have certain health plans with high deductibles. Unlike the case with FSAs, the money in HSAs is portable; you keep it all if you don’t use it, without any cap, and it follows you to a new job.
One catch, however, is that you cannot have both an FSA and an HSA unless your flexible spending account is a “limited purpose” version, for covering costs like those for dental and vision care.
Edward I. Leeds, a lawyer specializing in employee benefits with Ballard Spahr in Philadelphia, said the Internal Revenue Service recently clarified that the restriction applied even if the only money left in an FSA was a carry-over from the previous year. That means that if you want to contribute to a health savings account next year, it’s not enough simply to decline to put new money into your FSA; you can’t have any money left over from the year before, either.
Here are some additional questions about flexible spending accounts:
Q. What if I have more than $500 remaining in my FSA at the end of the year?
A. If your employer adopts the carry-over option, you may not carry over more than $500; unspent balances over that amount will still be forfeited. And keep in mind that your employer can choose to set a carry-over limit below the $500 maximum.
Q. Does the carry-over rule affect FSA contribution limits?
A. No. The annual maximum is currently $2,500.
Q. Does the carry-over option apply to other types of flexible spending accounts, like those for child care or other dependent care costs?
A. No. It applies to health care FSAs only, according to the Society for Human Resource Management.