FSA Carryover Provision

The Department of Treasury has modified the FSA use-or-lose rule to allow up to $500 of unused funds to rollover for use in the following plan year.

Flexible Spending Accounts (FSAs) have always been a great way for employees to budget for out-of-pocket  healthcare expenses. They also provide tax savings to both employees and employers. So why is it that only a  small percentage of eligible employees contribute to these money-saving accounts? For over 30 years, the use-or lose rule has been cited by participants as the number one deterrent for adoption of FSAs – namely the  fear of losing their money.

The Department of Treasury has modified its use-or-lose rule to allow a limited rollover of FSA funds, effective immediately. Up to $500 of unused FSA funds may now rollover to be used during the following plan  year. The new rollover rule is an additional option to the existing 2½ month grace period allowance. Employers  may offer the grace period or the rollover option, but not both.

Employees now have less risk of forfeiting unused funds. The stress of choosing the “right” election amount has  been greatly relieved. Without the barrier of the old use-or-lose rule, we anticipate enrollment rates and  contribution amounts to increase. And, as the amount of contributions increase, so will the savings for employers. ABG requires employees make an active new plan year election ($100 minimum) to take advantage of any carryover funds, otherwise these funds would be forfeited after run out is complete.

The effects the new provision may have on your FSA plan: 

  • Increased participation in next year’s FSA plan 
  • Greater employer savings from reduced payroll taxes due to increase in employee FSA contributions
  • Increased employee satisfaction with your benefit offering

Employers that want to adopt the new rollover provision for the current plan year will need to contact American Benefits Group. We are prepared to amend your current plan design to include the rollover provision. Current FSA plans that include the grace period may have amendment restrictions. All employers will be able to take advantage of the new rollover provision upon renewal of their plan.