Employees who are enrolled in a flexible spending account may have more leeway and discretion when it comes to using the money they have contributed to the tax-advantaged fund.
The U.S. Department of the Treasury recently unveiled modified rules relating to the "use it or lose it provision" of FSAs, which will enable accountholders to carry over a portion of unused funds at the year's end. Under previous rules, those with FSA were required to apply all the money in their accounts toward qualifying medical expenses by the end of the year, or forfeit the remaining amount. Under the new guidelines, however, consumers are permitted to roll over $500 of balances remaining at the end of a plan year. The adjustment is designed to make these accounts more user-friendly and help Americans retain more money.
"Across the administration, we are always looking for ways to provide added flexibility and commonsense solutions to how people pay for their healthcare," said Treasury Secretary Jacob Lew. "Today's announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year."
Impact on consumers
According to the federal agency, an estimated 14 million families participate in health FSAs and millions of dollars go unused at the end of the year. The modifications to the rule may prompt more individuals who are determining whether this account or a health savings account is the better option for their household. Unlike the former, HSAs enable consumers to carry over all remaining balances each year, and there are no limits on the amount that can be rolled over each year. Given this benefit, many people have historically been attracted to HSAs because they allow them to continue accruing funds over the years that can be used for medical expenses during retirement, when health bills are likely to be at their highest.
There are benefits and drawbacks to each type of plan, and the availability of each account may depend on what employers choose to offer in the way of benefits. Those who have the option to choose from both types of accounts and are unsure which may be the best plan for them may choose to consult a tax preparer to discuss their unique situation. For instance, those who have limited qualifying expenses and are in good health may opt for an FSA, while those who spend freely on these expenses or anticipate health problems as they age might consider the benefits of an HSA.