The Dept. of Treasury and the IRS issued a notice modifying the longstanding “use-or-lose” rule for health flexible spending arrangements (FSAs). The updated guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year. Some plan sponsors may be eligible to adopt a carryover provision as early as plan year 2013. In addition, there are existing options for plan sponsors to allow employees a grace period after the end of the plan year. However, a health FSA cannot have both a carryover and a grace period; it can have one or the other or neither.

Jeremy Miller, president and founder of FSAstore.com said, “Changes to the use it or lose it rule present a significant growth opportunity for flexible spending accounts. The use it or lose it provision was one reason why people shied away from FSAs. This change, coupled with the major pre-tax savings on out-of-pocket expenses, should encourage many new participants to take advantage of FSAs.”

The policy change is in response to public comments. An overwhelming majority of feedback was from individuals, employers, and other organizations that wanted the health FSA use-or-lose rule to be modified. With the use-or-lose rule, any account balances at the end of the year are forfeited. Those commenting said it is difficult for employees to predict needs for medical expenditures; FSAs need to be accessible to employees of all income levels; and there should be incentives to minimize unnecessary spending at the end of the year.