FSA Carryover Provision

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 allows a limited rollover of Health FSA and Limited Purpose FSA funds which shall be twenty percent (20%) of the maximum salary reduction contribution allowed under Section 125(i) of the Internal Revenue Code. The carryover occurs after all run out claims have been processed.

The Carryover Provision is an additional option to the existing 2½ month grace period allowance. Employers  may offer the grace period or the Carryover Provision, 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 ($10-$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 Carryover 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 Carryover Provision. Current Health FSA and Limited Purpose FSA plans that include the grace period may have amendment restrictions. All employers will be able to take advantage of the Carryover Provision upon the renewal of their plans.

Click here for current IRS carryover amounts IRS Benefit Limits - American Benefits Group