Fall has finally arrived in sunny California. For weeks, we have witnessed the shortening rays of the sun’s glorious light. Now, as the leaves explode in color to red, orange and yellow hues, we know that the holiday season is but a few weeks away.
For some, the holiday season can be stressful. How much turkey should I prepare for Thanksgiving dinner? Can I recycle a resolution from a previous New Year’s day? But one question that should be easier to answer this year is how much money to allocate to health flexible spending arrangements (FSAs).
Traditionally, health FSAs permitted employees to contribute a portion of their salaries on a pre-tax basis to an account that would be used to fund qualified medical expenses. However, FSAs had two disadvantages.
First, employees had to allocate the amount of the pre-tax contribution in advance. This works well for recurring, predictable medical expenses. For emergencies, health FSAs were not so great. If you did reserve for a rainy day but did not use the entire contribution by the end of the plan year (or the optional grace period), you would lose the money.
Since no one wants to forfeit good money, the law compelled people to empty out the balance of their health FSAs, regardless of the medical need. Better to buy an extra pair of glasses, than to lose the entire sum altogether. In other words, the forfeiture provision encouraged waste.
Last month, the U.S. Department of the Treasury and the Internal Revenue Service issued a notice that modified the “use it or lose it” rule. Under this regulation, employers may allow employees to rollover up to $500 of their unused health FSA contribution to the following plan year.
This provision, like the existing 2 1/2 month grace period, is entirely optional. Employers do not have to offer a grace period or the rollover. And, if they offer one, they cannot offer the other. If your employer offers health FSAs, be sure to ask whether the plan will be amended to permit rollovers of up to $500 at the end of the plan year.