Great news for employers sponsoring a Health FSA! The IRS recently modified the “use-or-lose” rule for Health FSAs. Now, your employees can carry over up to $500 of unused FSA amounts to the next plan year to use for qualified medical expenses. This is a very significant change and will encourage more of your employees to participate in your FSA plan, thereby helping you save additional FICA tax dollars.
Watch the video to the right to learn more about how the Health FSA Carryover benefits both you and your employees.
- $500 is the maximum Carryover amount. Any unused Health FSA amounts in excess of $500 remaining at the end of the plan year must be forfeited. Note that the 90-day Claims Runout Period still applies. Claims incurred during the prior plan year can still be submitted up to 90 days after the plan year ends (up to the full balance and not limited to $500). The Carryover would work to protect any dollars left after the Claims Runout Period, up to the $500 maximum.
- The Carryover does not affect your employees' maximum elections for the year. No matter what amount rolls over from one plan year to the next, an employee may elect up to the maximum salary reduction for his/her Health FSA (typically $2,500) in the next plan year.
- The $500 Carryover is not cashable and cannot be used for any other benefit offered under the plan. It can only be used to reimburse qualified medical expenses in the following year.
- The Carryover is not a one-time event. $500 is the total Carryover maximum that applies at the end of your plan year. Assuming the employee continues to be a participant, he/she can continue to carry over up to $500.
- Your plan may have previously included a 2.5 month grace period extending the date that claims can be incurred after the end of the plan year. The Carryover has replaced the grace period. Note regarding HSA eligibility: If you offer a High Deductible Health Plan and HSA bank account option that your employees will use in the next plan year, the Carryover could impact their eligibility to make HSA contributions immediately after the end of the FSA plan year. Generally, if your employees carry over FSA funds into the next plan year, they would be ineligible for HSA contributions. As such, the following options are available to preserve HSA eligibility:
- If an employee's account balance at the end of the plan year is $0 and nothing is eligible for carryover, he/she would be eligible for the HSA immediately upon end of FSA plan year;
- An employee could elect to forfeit any FSA carryover amount to preserve HSA eligibility; or
- Your plan offers a Limited FSA option for dental/vision expenses only, and an employee could elect to carry over his/her unused FSA funds to the Limited FSA to preserve HSA eligibility.
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