New FSA Rollover Policy Announced by the IRS

The FSA use-it-or-lose-it rule for health flexible spending accounts, or FSA, has been one of the most talked about rules since it was issued. The IRS has recently changed the rule, which will allow the accounts to be more flexible, and will help out millions of American individuals.

The new guidelines for the rule allows employers to allow employees to carry up to $500 of unused amount to the next year, while still allowing up to $2,500 in contributions. FSAs are voluntary plans that are account-based and allows individuals to use the pretax dollars to pay for eligible out of pocket health care expenses, such as co-pays, prescription drugs, and dental and vision costs.

Employees typically fund flexible spending accounts, but companies can also make contributions to the accounts. In the past, many individuals have avoided FSAs due to the use-it-or-lose-it rule, since any money they had put into the account had to be used by the end of the year or it’s lost.

Currently, employers have the option to offer a grace period up to two and a half months after the end of the year for their FSAs, which allows them to use the rest of the funds that were in the account. However, it’s important to keep in mind that employees don’t have the option to take advantage of both the grace period and rollover plan. They have to choose one or the other if they don’t use all the funds in their FSA.

For more information on both the rollover plan and the grace period for FSAs, contact Pacific Group, with locations in both Laguna Hills and Palos Verdes Estates. We will work with you to help ensure that you’re able to offer the right plans to all of your employees.