Promote FSA Plan Options to Extend Spending Time, Boost Enrollment
The "use it or lose it" provision of health-care flexible spending accounts (FSAs) often causes employees to say "fuhgedda-boutit." Forfeiting unused savings at year-end prevents many from participating in an otherwise attractive employer benefit.
However, businesses that offer an FSA can encourage more employees to enroll by adopting one of two options that soften the use-it-or-lose-it mandate. Under a special rule of the Internal Revenue Service (IRS), employers may choose to offer FSA enrollees more time to use their saved funds through either a carryover or grace period. A business benefits from worker enrollment in its FSA: The more employees that participate, the more FICA (Federal Insurance Contributions Act) savings for the employer.
FSAs help people save, budget for health care costs
FSAs are voluntary, account-based plans that allow enrolled employees to use pre-tax dollars (up to $2,550) during the 2016 plan year) to pay medical expenses not covered by their health insurance. Before the plan year begins, eligible employees must decide how much to contribute through payroll deductions. They can use FSA funds to pay for eligible out-of-pocket health care costs such as co-pays, prescription medications, vision care, and dental work for themselves, their spouse, and eligible dependents. And because participants use pre-tax funds, they decrease their taxable income.
FSAs require that enrollees must incur eligible expenses by the end of the plan year or forfeit any unspent amounts to the health plan. Those who find themselves with FSA money at the end of the plan year often rush to use it. The IRS offers the carryover and grace period options to reduce hasty, indiscriminate spending.
Carryover, grace period options stretch time to spend health care funds
Employers can choose either FSA extension option, but not both.
Under the carryover option, participants can carry over up to $500 of unused FSA money at the end of the year to apply to the next plan year. For the 2017 plan year there will be a $25 minimum requirement when choosing the carryover option. Anything less than $25 will be forfeited.
Under the grace period option, employees can roll their entire unused account balances over to the following year to pay for medical costs incurred during the first two and a half months of the next plan year (up to March 15) before they must forfeit the money.
Businesses tend to favor the carryover option. According to a survey conducted by WageWorks, a benefit program provider in partnership with credit card firm Visa, 60 percent of employers polled said they planned to offer a health care FSA with carryover in 2015 versus 49 percent in 2014.
A company can also decide to hold its FSA to the use-it-or-lose-it time frame.
FSA options benefit employees and employers alike
The options to extend FSA spending increase the program's appeal for all concerned. Employees don't feel as pressured to spend down their accounts on possibly trivial services. Employers want their workers to apply their FSAs to necessary medical care and not lose saved funds at year-end.
The WageWorks-Visa survey indicated that 63 percent of respondents using the carryover option saw their FSA enrollment rise 8 percent in 2015 versus 4 percent in 2014. The carrot, rather than the stick, produces a positive return.
Employers are not required to offer FSAs. Accordingly, interested employees should check with their company to learn whether the benefit is available (self-employed workers are not eligible). The IRS offers detailed information about FSAs at IRS.gov, and Paychex offers FSA plans, enrollment information, a tax calculator and more.