Flexible spending accounts were a miracle when they were introduced in the 1970s.
And they just got a whole lot better. Flexible spending accounts tackled inflation and rising medical costs by letting employees set aside pre-tax dollars to cover some medical and dependent care costs that arose throughout the year. That reduced the employees’ income tax bill and gave them money to ensure they could handle healthcare expenses. The only trouble was, if you didn’t use the money in the year, you’d lose it.
So people started taking that last bit of money in their FSAs and stocking up on over-the-counter meds like pain killers and allergy medicines and band aids, which I think is pretty resourceful. But the government had a different perspective and put the kibosh on that tactic, saying employees could only spend the money on things attached to a prescription. Then in 2005, the U.S. Treasury decided it would grant employees a 2.5 month grace period to spend the money rather than losing it forever on December 31. And now the Treasury has decided that if $500 of the allowed $2,500 is still in the account, employees can roll over the full $500 for the whole next year. Yeah!
You might ask, why not just switch to Health Savings Accounts (HSAs) that let you roll over the money from the get-go? The big reason is that FSAs can be used not only for the employees’ and their families’ healthcare expenses but for costs associated with dependant care. It can pay for childcare or to hire someone to care for your aging mother while you’re at work. HSAs don’t do that.
But, AND this is an important point: If you are an employer, you have to amend your FSA plan to allow your employees to roll over that $500. If you don’t, they can’t. And that won’t make them very happy. So it’s crucial to call your third-party administrator to make sure you amend your FSA plan to let employees carry their $500 balances over for a year before the end of the plan year, which is usually December 31. I wouldn’t wait until then, though.
If you want any help figuring out what benefits plan would work best for your company and your employees, call us!
We work with companies on a project basis or on retainer, providing a custom level of HR help designed for your business. Contact me at Caroline@valentinehr.com or call (512) 420-8267.