Use or Lose Your Health FSA

Use or Lose Your Health FSA

A health flexible spending account (FSA) is an employer-sponsored account that employees can use to pay for or reimburse their qualifying medical expenses on a tax-free basis, up to the amount contributed for the plan year.  Employees are generally required to use their health FSA funds by the end of the plan year or the funds will be lost.  This “use-or-lose” rule generally prohibits any contribution or benefit under a health FSA from being used in a later plan year or period of coverage. The IRS allows employers to offer an extended deadline, or grace period, of two and a half months after the end of a plan year to use remaining health FSA funds.

Additionally, the IRS modified the “use-or-lose” rule for health FSAs in 2014.  Under this relaxed rule, employers may allow participants to carry over up to $500 in unused funds into the next year.  A health FSA may permit carryovers only if it does not also incorporate the grace period rule.

The carryover of up to $500 may be used to pay or reimburse medical expenses under the health FSA incurred during the entire plan year to which it is carried over. For this purpose, the amount remaining unused as of the end of the plan year is the amount unused after medical expenses have been reimbursed at the end of the plan’s run-out period for the plan year.

If an employer amends its plan to adopt a carryover, the same carryover limit must apply to all plan participants. A cafeteria plan is not permitted to allow unused amounts relating to a health FSA to be cashed out or converted to any other taxable or nontaxable benefit.