President's Budget Proposes $500 Rollover for Flexible Spending Accounts

Any unspent money left in flexible spending accounts at the end of a year now has to be forfeited – a huge deterrent to employees considering using an account to reduce tax liability.

However, two Congressional proposals could end the current “use-it-or-lose-it” rule and increase employee use and satisfaction with the accounts.

The changes would authorize employers to allow employees to carry over up to $500 in unspent FSA dollars from one plan year to the next.

Based on the draft provisions in President George Bush's budget, the funds unspent on medical expenses during a plan year could be distributed to employees or contributed to 401(k), 403(b), or 457(b) plans or medical spending accounts. The amounts would be subject to income tax withholding and employment taxes. All amounts contributed to another plan also would be subject to that plan’s normal rules and regulations.

If adopted, the changes would be effective for plan years beginning after Dec. 31, 2003.