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Flex spending rules eased

Washington—The Treasury Department will modify longstanding “use-or-lose” flexible spending account rules to allow a carryover of up to $500 of unused FSA funds at employer discretion. Some 14 million families use FSAs to pay for medical and dental expenses.

“Today’s action directly responds to public comments invited by the Treasury Department and the IRS,” Treasury announced Oct. 31. “An overwhelming majority of feedback from individuals, employers and others requested that the use-or-lose rule for health FSAs be modified. Comments pointed to the difficulty for employees of predicting future needs for medical expenditures, the need to make FSAs accessible to employees of all income levels, and the desire to minimize incentives for unnecessary spending at the end of the year.”

The Association has supported an easing of FSA restrictions, including the Affordable Care Act’s $2,500 annual cap, which took effect in 2013, on employee contributions to employer-sponsored FSAs. Contributions to an FSA are not includable in employee income and reimbursements from an FSA that are used to pay qualified medical expenses are not taxed.

Under the new guidance, and the amended regulations that will reflect Treasury’s guidance, employers will still be allowed to offer a grace period for spending down FSAs or a carryover of up to $500 of unused amounts or neither, but they can’t offer both. The “clarifications” of FSA rules may be applied beginning on or after Dec. 28, 2012, the date on which proposed regulations were issued, Treasury said.