The IRS has modified the use-it-or-lose-it rule for flexible spending accounts that has long frustrated many employees who would like to participate in their employer’s plan. Up until November 2013 there were two options employers could choose from when setting up their flexible spending account plan for employees:

The IRS has modified the use-it-or-lose-it rule for flexible spending accounts that has long frustrated many employees who would like to participate in their employer’s plan. 

Up until November 2013 there were two options employers could choose from when setting up their flexible spending account plan for employees:

1) Any amount elected by the employee but not spent for current plan year expenses is forfeited.

2) A grace period of up to 75 days could be implemented allowing employees to use prior year funds in the current year (the full balance from the prior plan year continues to be available during the grace period).  After the grace period expires, the employee forfeits any remaining prior year balance.

With the new modification employers now have a third option:

3) Employees can carry over up to $500 from the unused prior year funds into the new plan year and can use those funds at any time in the year (no grace period expiration).

It is important to note that an employer can elect either the grace period or the $500 carryover, but not both. 

If you, as the employer, already have the grace period in place for your employees, Savers Admin recommends keeping that option rather than moving to the $500 carryover.  Ultimately, we feel the employee receives a greater benefit with that option.  If you do not have the grace period in place, we recommend implementing either the grace period or the carryover in order to encourage more employees to participate in the plan.

In the next several blogs, we will provide examples of the grace period vs. the carryover to help you better understand the option and make the right decision for you and your employees.