As the end of the year approaches, HR should remind employees with flexible spending accounts (FSAs) to determine whether they need to spend some or all of their unused funds before the end of the year (or extra grace period) to avoid forfeiting them.
Adding to the annual year-end confusion: In October 2013 the U.S. Treasury Department announced a major change to the long-standing use-or-lose rule for health FSAs. Plans may now allow participants to carry over $500 annually. Employers must amend their plans to eliminate the current two-and-a-half-month grace period, if they provide it. (To learn more, see the SHRM Online report "FSA Use-It-or-Lose-It Rule Modified.")
Because of the late timing of the rule change, which caught employers and benefits professionals by surprise, some companies will not implement the $500 carryover provision this year, and some may choose not to implement it at all. But others are adopting the carryover provision into their plans so leftover funds from the 2013 plan year will remain available in 2014.
FSA administrator WageWorks Inc. has advised HR to communicate one of the following messages to employees, based on the employer's decision about the carryover provision:
- If the business adopted the carryover for the 2013 plan year, up to $500 of unused funds at the end of this year will still be available in 2014. FSA users should try to spend down any balances above $500.
- If the company has not adopted the carryover for 2013, FSA users should attempt to spend their entire remaining balance before the end of the plan year, which may include a grace period lasting into 2014.
- If the employer adopts the carryover for the 2014 plan year, workers may want to consider enrolling in an FSA or adjusting their contribution level, as $500 of unused funds will carry over into the 2015 year.
The rule change applies to health FSAs and to limit-scope FSAs for dental and vision expenses. However, it does not apply to dependent-care FSAs, so participants in those plans must still spend their remaining funds before the end of the plan year or the end of the grace period, depending on their plan's details.
FSA Administrators Predict Significant ‘Rollover’ Adoption
for 2014 Plan Year
Following the Treasury Department's Oct. 31 modification of the FSA “use-it-or-lose-it” provision, Alegeus Technologies, a provider of administrative platforms for tax-advantaged benefit accounts, conducted a survey of more than 200 FSA administrators. The results point to significant employer rollover adoption for the 2014 plan year and modest gains in both FSA enrollment and account contributions.
When asked which option will be more compelling to participants, nearly 80 percent of survey participants indicated that “rollover” will be more compelling than “grace period.’
Although employers have the option of amending 2013 FSA plans to include the rollover, 47 percent of survey respondents predict that less than a quarter of employers would do so.
In contrast, rollover adoption for 2014 FSA plans is anticipated to be more significant, with 33 percent of survey respondents predicting that more than half of employers will adopt the rollover option, and 22 percent predicting more than 75 percent will adopt it.
For plan year 2014, the majority of survey respondents predicted a 10-25 percent growth in both FSA enrollment and account contributions as a result of this rule change.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related External Analysis:
'Use It or Lose It?' A Closer Look at the Recent IRS Guidance on Flexible Spending Accounts, Crowell & Moring LLP, November 2013
Related SHRM Articles:
FSA Use-It-or-Lose-It Rule Modified, SHRM Online Benefits, November 2013
Year-End Tips to Spend Down FSAs, SHRM Online Benefits, January 2012
SHRM Online Benefits Topics & Strategy
SHRM Online Health Care Reform Resource Page
SHRM Online Wellness Programs Resource Page