Get access to the exclusive HR Resources you need to succeed in 2018.
Sign up for free email newsletters and get more SHRM content delivered to your inbox.
Is your employee handbook keeping up with the changing world of work? With SHRM's Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Build competencies, establish credibility and advance your career—while earning PDCs—at SHRM Seminars in 14 cities across the U.S. this fall.
Gain the skills you need to rise to the next level in your career. Jon us at SHRM's Leadership Development Forum, October 2-3 in Boston.
The new limit applies to salary reduction contributions under a health care FSA
Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.
last updated Nov. 18, 2013
Update: IRS Allows $500 Annual Carryover for Health FSAs
On Oct. 31, 2013, the U.S. Treasury Department and the IRS issued
a notice and
fact sheet announcing a major change to the long-standing use-or-lose rule for health flexible spending accounts (FSAs). The modification permits plans to allow participants to carry over $500 annually. Employers must amend their plans to eliminate the current grace period if they provide it. To learn more, see the
SHRM Online report
FSA Use-It-or-Lose-It Rule Modified.
The U.S. Internal Revenue Service issued
Notice 2012-40 on May 30, 2012, with guidance on the $2,500 limit on pretax employee contributions to health care flexible spending accounts (FSAs) under the Patient Protection and Affordable Care Act (PPACA). The reform law limit on the amount that employees can set aside in FSAs is scheduled to take effect in 2013.
Among the points clarified in the notice:
'Use or Lose' Rule Debated
In light of the $2,500 limit, the Treasury Department and IRS are considering whether to modify the annual "use it or lose it" rule that has been the bane of FSA users. That rule generally prohibits a contribution under an FSA from being used in a subsequent plan year or period of coverage. Unused amounts in the FSA are forfeited, typically to the employer, at the end of the plan year, with an additional grace period that employers may incorporate into their plans.
The IRS requested comments on whether the proposed regulations should be modified to provide additional flexibility with respect to the operation of the use-or-lose rule for health care FSAs and, if so, how any such flexibility might be formulated and constrained. Comments are also requested on how any such modifications would interact with the $2,500 limit."
The comment deadline ended on Aug. 17, 2012.
[Update: On Oct. 31, 2013, the Treasury Department and IRS issued
a notice and
fact sheet announcing that employers that offer FSA programs that do not include a grace period will have the option of allowing participants to roll over up to $500 of unused funds at the end of the plan year. See the
SHRM Online article "FSA Use-It-or-Lose-It Rule Modified"]
The Employers Council on Flexible Compensation (ECFC), a trade group, issued
a statement saying it has "heard from employers that many employees elect not to participate in an FSA because they fear losing their hard earned dollars. We have also heard from policy makers who have expressed concern that the use it or lose it rule encourages FSA participants to spend their dollars on unnecessary services and items at the end of the year, which contributes to inefficient health care spending. Eliminating the use it or lose it rule, however, will do away with this perverse incentive for such behavior."
However, some employers contend that the forfeited amounts are needed to cover the cost of providing FSA administrative services without passing those expenses along to employees.
Legislation Would Allow OTC Reimbursements
In another FSA-related development, Congress is considering legislation that would reverse the PPACA's ban on using FSAs and other pretax accounts to pay for most over-the-counter (OTC) medications without a prescription.
Under the reform law, employees with health care FSAs, health savings accounts (HSAs), health reimbursement arrangements (HRAs) and Archer medical savings accounts (MSAs) must present a doctor's prescription or a letter of medical necessity from a physician in order to use an account-linked debit card or check to purchase most OTC medications, or they must submit a receipt listing an Rx number or a doctor's prescription plus a receipt detailing the purchase in order to be reimbursed. The law took effect on Jan. 1, 2011.
As a result, the cost of OTC medications and other OTC items—including aspirin, acid reflux medications, allergy medications and eye drops—no longer can be reimbursed through FSAs and other tax-preferred arrangements without a prescription.
Exceptions allowing reimbursement are permitted for insulin, testing materials, birth control, first-aid kits and other medical supplies. A listing of what is and isn't covered by the OTC restriction is provided in a
fact sheet from WageWorks, an FSA services provider.
Restoring Access to Medication Act, sponsored by Rep. Lynn Jenkins, R-Ky., and introduced on May 18, 2012, has drawn support and opposition. According to
an opposing statement by the Center on Budget and Policy Priorities: "Just one worker in seven has an FSA, and an even smaller fraction of workers is enrolled in other tax-favored accounts. High-income people benefit disproportionately from tax-advantaged accounts because they are in higher tax brackets, tend to consume more health care, and can afford to deposit larger amounts in their accounts. Purchases of over-the-counter medicines, such as aspirin and cough syrup, constitute routine personal expenses that do not generally deserve a tax subsidy."
However, the American Medical Association is among those advocating for an end to the OTC reimbursement exclusion. An
AMA statement contends: "Rather than saving money, the new policy may increase overall health care spending by forcing patients to schedule office visits with their physicians to obtain prescriptions for OTC medications, or they may seek more expensive prescription drugs that are covered by their health insurance plans. Furthermore, since a prescription for an OTC product must be treated as any other prescription, recordkeeping requirements are increased for both physicians and pharmacies."
Related SHRM Articles:
Related External Article:
Working with the New Annual Limit on FSA Contributions, Verrill Dana LLP, November 2012
SHRM OnlineBenefits Discipline
SHRM OnlineHealth Care Reform Resource Page
• Sign up for SHRM's free
Compensation & Benefits e-newsletter
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Please sign in as a SHRM member before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
Become a SHRM Member
SHRM’s HR Vendor Directory contains over 10,000 companies