Just in time for the fall open enrollment period when employees are grappling with benefits choices, the Treasury Department announced changes to the dreaded use-it-or-lose-it rule that you forfeit unused money in your healthcare flexible spending account at the end of the year. While the press release touts the change as “consumer friendly,” it’s not a cure-all by any means, and it could still result in employees forfeiting money. This has a big impact: Some 14 million employees participate in healthcare flexible spending arrangements.
The new rule, which employers MAY adopt, would let employees use up to $500 of unused money in their accounts at the end of a plan year in the following plan year. There are a lot of “ifs.” First, your employer has to amend its plan documents to allow this (it’s possible this can be done for plan years that already started mid-year 2013, and for 2014 plan years). Second, the employer would have to drop a common grace period that already lets employees spend down unused money in the two and a half month period following the end of a plan year. Yes, that’s right. The new rules say that employers have to choose between the old grace period and the new $500 carry over provision.
So in some cases, employees could be worse off with the new rule. Say you had $1,000 left in your account at the end of a plan year in a plan that had a grace period. If you used it during the grace period, you wouldn’t lose it. But if your plan adopts the new $500 carry over rule, you’d be out $500. (See example 4 in the new rules, showing a $600 unused balance and a $100 forfeiture here if you can stand it.)
The bigger problem is that employees are still stuck guessing during open enrollment what they might spend the following year. That’s because healthcare flexible spending arrangements are part of what’s known as “cafeteria plans” where you have to make elections early to take advantage of tax breaks you get later. The money you put in an FSA is pre-tax salary deferral so assuming you pay combined 40% state and federal tax rate, you’re saving 40% off healthcare expenses funded through the account. The Treasury Department also announced inflation-adjusted figures for 2014 today, and the dollar limit of how much you can contribute to a healthcare flexible savings account remains the same at $2,500 (that limit, which hurt employees with high out-of-pocket health expenses, was imposed as part of Obamacare).
Under the new rules, if employees underestimate their expenses, they still lose out on the tax break because they’re not maximizing it. They’re still likely to underestimate expenses or not use the accounts at all. (At least, you would be allowed to carry over the $500 and still put another $2,500 away for the same plan year). Also, the employer can pick a lower amount than $500 or not put in the carry over provision at all.
Thankfully, the new rule doesn’t impact “run-out” periods that allow employees a certain amount of time in the new plan year to submit expenses incurred in the prior plan year.
The better way to have made these accounts easier to manage would have been to make them like health savings accounts—where you defer your money and it’s yours to keep and spend when you want. That way there is no guessing! When you go to the orthodontist or the eyeglass store because you need to the money is there. You don’t have to delay needs waiting until the next year to put money into a flexible spending account.