IRS Announces "Use-It-Or-Lose-It" Rule for FSAs

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November 13, 2013 — 1,961 views  
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FSAs, or Flexible Spending Accounts, are financial accounts that benefit from certain tax advantages attained through cafeteria plans as well as other employee benefits offered through Section 125 of the IRC (Internal Revenue Code). Though these bring down the total payroll tax that an employee has to face, the ‘use-it-or-lose-it’ rule implies that those who do not avail of the amount actively within the specified year do not receive any compensation for the lost amount. Recently, as a direct response to some of the suggestions the IRS has received, there have been a few significant amendments made to the ‘use-it-or-lose-it’ rule.

Important New Changes Made to the Rule

Now, however, employers are allowed to grant people working under them up to $500 to carry over to the next year into healthcare FSAs. This means that if employees have not used the entire amount that they are entitled to in a single year, they can carry over up to a maximum of $500 and credit it to their flexible spending arrangement for the following year.

How Pending Amounts Could be Availed of Earlier to the Amendment

Up until now, people were able to carry over pending amounts only if they incurred medical bills within two and a half month window period from the ending of the year, before having to give up the amount entirely. Though the original pre-taxed amount was $2,500, now the additional amount is also not taxed.

Pending Decision to be Made by Employers

The plan has to be changed before the end of the original plan for the amendments to benefit those who already have such benefits. Organizations have time until the end of 2014 to make a final decision on whether they want to incorporate the changes made to benefit their employees or not. Now that the amendments have been made and the decision simply remains on employers of different firms, the process may take some time.

Difficult Choice of Employers to Incorporate Changes or Not

Though there is a deadline, employers have to consider a number of different things including the benefits of meeting the expectations of their employees as well as the value created by permitting the amount to be carried over in this fashion. The amendments made are a direct outcome of response that the IRS received from people when it asked for feedback regarding the ‘use-it-or-lose-it’ rule.

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