By: Cynthia Rivera, J.D.
A Flexible Spending Account (FSA) is an employer-sponsored account that allows you to make pre-tax contributions out of your salary to pay for qualified medical expenses. If you currently own an FSA this is a reminder that the U.S. Treasury modified the “use it or lose it” rule for those accounts allowing an up-to-$500 carryover for year-end balances.
Under the carryover option, an employee can allocate up to $500 of unused funds to the following plan year. This means that an individual does not have to spend every FSA dollar by the end of the year. For example, if you elected $2,600, but only spent $2,200, you can carryover the $400 difference to use next year. However, if you only spent $2,000 of your $2,600, you could carry over $500, but will lose the $100 difference. As a result, the current $500 carryover option can allow you to minimize or even eliminate the monetary impact from the FSA’s prior “use it or lose it” rule.
Note that the $500 carryover rule is different than the grace period rule previously established to modify FSA’s “use it or lose it” rule. The grace period rule allows you to use any unspent funds remaining in your Flexible Spending Account during a determined period of time within the following plan year.
Consider the FSA’s grace period rule as a spending extension. Typically, the grace period rule allows you to use your funds from the previous year to pay for certain qualified expenses incurred during a period of up to two and a half months immediately following the end of the prior plan year. For example, if your plan runs from January 1, 2019 through December 31, 2019, you would have until March 15, 2020 to use all of your FSA funds. The remaining balance for the 2019 plan year would be lost after the grace period ends.
Keep in mind that an FSA cannot have both a carryover and a grace period feature. Employers can offer either option, or none at all, but not both. Because the $500 carryover and grace period provision details are specific to each employer’s plan, you should first consult with your employer before making any decisions related to your account.
With the carryover and grace period provisions, an FSA has become a more attractive option, provided that your employer offers one of these features, you may not have to worry about using or losing all of your funds by the end of the year.