Finally! Feds kill ‘use-it-or-lose-it’ rule: What’s OK now?

Good news: The IRS just took a drastic step regarding flexible spending accounts many had been predicting for years. 

The IRS just announced that FSA account-holders can carry over up to $500 into the next plan year, effective for 2013 into 2014. However, after December 31, 2013, the FSA use-it-or-lose-it rule will still apply to amounts over $500.

In addition, the $500 does not count toward the $2,500 limit on FSA contributions, which was an Obamacare requirement that started in 2013. That means a total of $3000 can be contributed to employees’ FSAs for the 2014 plan year — but $500 of that has to be carried over from 2013 and only $500 of that can be carried into the following plan year.

In addition, the FSA grace period rule — a 2005 IRS modification made it possible for leftover FSA funds to be used for healthcare expenses incurred in the first two-and-one-half months of the following plan year — will still remain in place.

Employers offering plans with FSAs will want to let workers know about the IRS change regardless of whether they’ve already held their open enrollment presentations.

‘Eliminates the perceived risk of losing money’

The IRS move has been lauded by a number of prominent business groups, including the National Business Group on Health (NBGH).

NBGH President Joe Jackson said the “rule change eliminates the perceived risk of losing money when employees consider signing up for an FSA. The timing of this change could not be better, as most companies are now in their open enrollment period.”

The fear of losing unused FSA money has long been a major obstacle for firms in terms of getting workers’ to sign-up and contribute to an FSA.

In fact, 85% of large companies currently offer FSAs, but just 20% to 22% of eligible employees sign up for a FSA, according to research by Alegeus Technologies.

This post originally appeared on our sister website, HRBenefitsAlert.com.