Workers who put money into use-it-or-lose-it Flexible Spending Accounts each year could benefit from a new IRS rule letting them roll over up to $500 at the end of each year.
Flexible Spending Accounts, or FSAs, allow employees to set aside money from their monthly paychecks to pay for such things as medical expenses or dependent child care that are not covered by insurance. Each year, they can accrue up to $2,500 without payroll taxes, but if the set-aside amount isn’t used before the end of the calendar year, it is forfeited.
The change, announced Thursday, modifies a 30-year-old restriction and now allows workers to carry over up to $500 into the next calendar year without being penalized.
Secretary of the Treasury Jacob Lew said in a statement that the “announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”
About 14 million Americans use FSAs. But it can be difficult to predict how much will be used from the account, and the prospect of losing unused money has discouraged many people from using the accounts.
“With less risk of such forfeitures now, experts predicted that more workers, particularly lower- and moderate-income employees, would take advantage of the deductions for everyday medical expenses, such as co-pays, over-the-counter drugs and other items not normally covered by health insurance.
“We are always looking for ways to provide added flexibility and common-sense solutions to how people pay for their healthcare,” Lew said.
Treasury officials began taking public comments on the change last year, and they said the response was overwhelmingly in favor of giving workers more leeway.
The new rules go into effect immediately, but they aren’t mandatory for employers. Firms can decide whether to make the change and when to make it.”