The New Use-It-Or-Lose-It Rule for Health-care Flexible Spending Accounts

A new Treasury Department ruling gives workers with health-care flexible spending accounts more time to spend their money.

In one of the biggest developments this year for cafeteria plans, the IRS announced that plans now can reimburse participants for claims incurred up to 2 1/2 months after the close of a plan year.

Under the previous rules, reimbursements were permitted only for claims incurred during the plan year. Plans that adopt the optional 2 1/2 month grace period will likely see a decrease in forfeitures of health-care savings account balances and an increase in enrollment.

Although it did not abolish the use-it-or-lose-it rule altogether as supporters of flexible spending accounts had hoped, the department said the revised rule and short extension would "ease the year-end spending rush" created by the old regulations.

Health-care flexible spending accounts allow workers to have pre-tax money deducted from their paychecks for out-of-pocket medical costs. Dependent-care accounts allow workers to use pre-tax money to pay for childcare.

Flexible spending account supporters say the use-it-or-lose-it rule discourages many workers from using the accounts. While 22 million workers have access to the accounts, only about 7 million sign up, according to the Employers Council on Flexible Compensation. Workers who participate put aside relatively small amounts.

In addition, the rule encourages participants to spend money on products and services they don't need. A bill that would have allowed workers to carry over up to $500 in unused funds passed the house last year but failed to win Senate approval.

Source: Benefits Institute of America