The Treasury Department and Internal Revenue Service have modified the longstanding “use-or-lose” rule for health flexible spending arrangements. Employers will be able to allow plan participants to carry over up to $500 of their unused FSA balance at the end of a plan year.
Health FSAs are benefit plans employers can sponsor to allow their employees to be reimbursed on a tax-favored basis for certain medical expenses that are not covered by the employer’s major medical plan. An estimated 14 million families participate in health FSAs, offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Contributions to an FSA are not includible in the employee’s income, and reimbursements from an FSA that are used to pay qualified medical expenses are not taxed.
