Flex Spending “Use it or Lose it” is a Thing of the Past

Prescription (Photo credit: quinn.anya)

If you have a Flex Spending Account (FSA) for healthcare expenses through your employer, you are familiar with the “use it or lose it” concept.  Each year during December, it’s a mad dash to get that last-minute eye exam, or fill prescriptions, or what-have-you to use up the Flex Spending money before the end of the year.  That tradition will, for many folks, be a thing of the past if their employers adopt the carryover rule now allowed by IRS.

Traditionally, with a Flex Spending Account (FSA) for healthcare expenses you arrange with your employer to withhold a certain amount of money out of each paycheck and then as you incur expenses for healthcare throughout the year, you can be reimbursed for those expenses up to the amount of your annual withholding for FSA.  The money withheld for the FSA is pre-tax, so it’s to your advantage to take part in such a plan if you know you’ll have medical expenses. Social Security and Medicare tax is taken out before FSA money is deducted, however.

And then, if you haven’t used all of your FSA money by the end of the year, you forfeit access to the money.  Some, in fact many, employers have a 2½ month grace period, allowing participants to claim healthcare expenditures against the FSA up to March 15 of the following year.

Recently the IRS made a change to the “use it or lose it” rule, allowing a participant in a FSA to carryover up to $500 of unused funds to the following year.  Employers must make an amendment to their FSA plan in order to allow this – it’s not automatically available.  But if your employer does amend their plan by the end of 2013, you could carryover unused funds up to $500 into 2014.  The carryover is not accumulative – meaning, if you carryover $500 from 2013 to 2014, you can’t carryover an additional $500 (for a total of $1,000) into 2015.

The ease of rules for FSA does not apply to Flex Spending Accounts for family care expenses, however.  This is a similar account where the pre-tax money is used to pay for childcare or adult-dependent care expenses that are not health-related.