Update: FSAs Just Got a Little More Flexible

Back to Blog

The IRS recently announced that an employer may allow FSA participants to carry over up to $500 of unused funds in their FSA to be used on expenses the following year.

Flexible Spending Accounts (FSAs) allow employees to allocate a portion of their salary throughout the year to pay for qualified health care expenses. Individuals can set aside up to $2,500 of income that is not subject to federal income tax to pay for health expenses for the coming year.

Historically, because of the use it or lose it rule, any money left in the FSA at the end of the plan year has been forfeited. In 2005, the IRS eased the rule slightly and allowed employers to offer a grace period, giving employees until March 15th the following year to submit claims for unused funds.

The IRS recently announced that an employer may allow FSA participants to carry over up to $500 of unused funds in their FSA to be used on expenses the following year. This notice is effective immediately and may be adopted by some plan sponsors for the 2013 plan year. The existing option of offering grace periods remain in effect. However, an employer cannot offer both the carryover option and the grace period option. Employers must choose between the two.

Read the fact sheet developed U.S. Department of the Treasury and the IRS for more information.


Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough analysis of specific issues, nor a substitute for a formal opinion, nor was it written to be used to avoid tax related penalties.