Employees love Flexible Spending Accounts, or FSAs. These tax-advantaged accounts give them the ability to set aside tax-free dollars to pay for qualified medical expenses, similar to an HSA. Unlike an HSA, though, an FSA can be paired with any type of health plan, including plans with up-front copayments for doctor visits and prescriptions. The drawback, of course, is the “use it or lose it” rule; employees whose FSA contributions exceed their annual medical costs must either go on a spending spree at the end of the year or risk losing any unspent funds.
In 2013, to help reduce this risk and encourage more workers to participate in their company’s Flexible Spending Account, the IRS issued Notice 2013-71, which “permits § 125 cafeteria plans to be amended to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule.”
That’s a long sentence, but here are the three most important points:
The reason we’re posting this reminder now is because it’s the fourth quarter, and a lot of employer groups have a January 1 renewal date. While you’re reviewing their renewal options with your group health clients, be sure to talk with them about a Flexible Spending Account.
If you need some help convincing your clients that this is a good idea, the Treasury Department offers a pretty good sales pitch in a fact sheet that accompanied the 2013 IRS notice:
The rollover option “makes health FSAs more consumer friendly by relaxing the use-or-lose rule. This will enable employers, for the first time, to permit employees to use up to $500 of unused health FSA amounts in the next year, instead of forfeiting the unused amounts. Notably, most forfeitures are less than $500. Individuals can now participate in a health FSA without the risk of losing all of their unused contributions. This also cuts back on wasteful year-end FSA healthcare spending by limiting the risk of forfeiture, and in turn, reducing the incentive to spend down as year-end approaches in order to avoid losing unused funds.”
For more information on the FSA rollover option, check out IRS Publication 969. And, of course, be sure to find a good Third Part Administrator (TPA) that can help guide your clients and keep them compliant.