IRS Eases Restrictions on Flexible Spending Accounts

IRS has announced that employers can allow FSA participants to carry up to $500 of their  balances into the next year — and it can be effective in plan year 2013. Up until now, any money remaining in the account would have been forfeited. The added FSA flexibility is a response to comments from the public about the challenge of accurately predicting medical expenses, especially for certain income levels, and the unnecessary spending prompted by the use-or-lose rule.

Under current law, employers may allow a grace period of up to two and a half months, during which employees can spend funds remaining from the previous plan year. The grace period option will remain in place, but FSAs cannot have both the grace period and carry-over options. Under the Affordable Care Act, health care FSAs are capped at $2,500. Previously, employers often set it at $5,000, but there was no mandated cap.