Now that the beginning of the year is here, individuals who religiously contributed to their Flexible Spending Account (FSA) plans need to take steps to prevent losing the hard-earned dollars on their plans. Even if you or your spouse forgot about the December 31 deadline to spend your health FSA monies, there may still be a way to spend some or all of those funds in 2017 (or any other year). Let’s review the “use-or-rule” from the IRS, list of permissible carryover options, difference in carryover between a FSA and an Health Savings Account (HSA), and set of guidelines when spending carryover amounts in 2017.
An overview of the “use-it-or-lose-it” ruleFSA plans have a long history that dates back to 1970’s. The IRS created FSA plans to allow employees to use pre-tax dollars for eligible medical expenses and dependent care expenses not covered by their employer-sponsored health plan. Just like contributing with pre-tax dollars to a retirement account, setting aside pre-tax dollars in a FSA allows plan holders to reduce their taxable income.The only catch was that any unused balance on a FSA as of December 31st wouldn’t carry over to the next year. This went on for decades and it wasn’t until 2005 that the Treasury Department and IRS modified the “use-or-lose” rule by adopting a grace period rule. Under the grace period rule, employees may have an extra period of up to two months and 15 days immediately after December 31st to use amounts remaining from the previous year.In November 2013, the IRS further modified the “use-or-lose” rule by providing employers the option to allow up to $500 of unused monies at the end of the year to be paid or reimbursed to plan participants for qualified expenses in the following year, foregoing the grace period rule.
Contact your employer to find out your carryover optionsThis means that you need to contact your HR department right away to find out what is the applicable carryover rule to your FSA. Since plans vary per company, you should go straight to the source right away. Here is a breakdown of the carryover options that may be offered by your employer.
Option 1: Grace period of two months and 15 daysThe best case scenario is that your employer give you until March 15th, 2017 (or any subsequent year) to spend all of your unused funds in our FSA. Since the maximum contribution limit to a health FSA was $2,550 in 2016, your carryover is capped at $2,550. Even though the maximum contribution limit to a health FSA is $2,600 in 2017, carryovers from 2016 to 2017 are still capped at $2,550. In this scenario, any unused funds from 2016 that aren’t used by March 15th would be lost.
Option 2: Carryover is limited at $500In this scenario, your employer only allows you to carry over only up to $500 in unused funds in your FSA.
- If you were to have $750 balance in your FSA by the end of 2016, then you would only be able to carry over $500 into 2017 and lose the extra $250.
- On the other hand, if you were to have a $350 balance in your FSA by the end of 2016, then you would be able to carry over the full $350 into 2017.