The federal government unveiled a policy change today that is expected to provide a significant incentive for employees to participate in company sponsored Section 125 plans for Flexible Spending Accounts (FSA).
The U.S. Treasury Department announced that it will modify its FSA “use-it-or-lose-it” provision to allow employees to roll over a limited amount of unused FSA funds at the end of each year.
FSAs allow employees to contribute pre-tax dollars to pay for out-of-pocket healthcare expenses such as deductibles, copayments, and other qualified medical, dental or vision expenses not covered by the individual’s health insurance plan. Employers often encounter resistance to such programs from workers concerned with the requirement that any money remaining in an FSA at the end of the plan year (or after a grace period) is forfeited to the employer – even though the funds have been contributed directly by the employee via payroll deduction.
The two major changes announced by the government are:
- Effective in plan year 2014, employers who offer FSA programs will have the option to allow participants to roll over up to $500 of unused funds at the end of the plan year or to allow participants to continue their current grace period. Participants cannot do both. Employers will need to decide prior to their upcoming open enrollment period whether their 2014 Health Care FSA will be a $500 carryover plan or a grace period plan.
- Effective immediately, employers who offer FSA programs that do not include a grace period will have the option to allow employees to roll over up to $500 of unused funds at the end of the current 2013 plan year.
The change to Health Care FSAs follows the Affordable Care Act limitation on employee FSA contributions to $2,500 per year effective January 1, 2013. The $2,500 limit will be adjusted for inflation in future years. This carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the participant is permitted to make.
The Massachusetts Health Connector announced Monday that it plans to file legislation to repeal several key requirements of the state health reform law, including the Section 125 requirement, the Employer Health Insurance Responsibility Disclosure (Employer HIRD) requirement, the free-rider surcharge, and the recently created Section 125 notification requirement. That announcement addressed the use of a section 125 plan to purchase individual health insurance and does not affect employee contributions to Health Care FSAs.