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What is the FSA “Use it or Lose it” rule?

Basics

In the past, one of the biggest drawbacks surrounding Flexible Spending Accounts (FSAs) was the "Use it or Lose it" rule. This rule stipulates that FSA account holders must use the entirety of their tax-free funds before the end of each plan year, or risk losing that money.

However, recent changes by the U.S. Treasury Department can make forfeiting FSA money easily avoidable if healthcare spending is carefully planned over the course of a year. Let's explore these new user-friendly rules that can save you money.

The FSA Carryover Rule

Thanks to a rule implemented by the U.S. Treasury Department in October 2013, FSA account holders may now carryover up to $500 of their tax-free funds at the end of their plan year into the following year's allocation – that is, if their FSA allows for this option. This is a huge boost for account holders, many of whom were initially turned off by the idea of FSAs due to the "Use it or Lose it" rule, who will now have far more freedom to set aside pre-tax money for healthcare expenditures throughout the year without worrying that a huge chunk of their hard-earned salary will be forfeited.

The FSA grace period

Another option that employers may choose for their FSA is offering the grace period. In 2007, the U.S. Department of the Treasury ruled that employers who offer FSAs under a cafeteria plan can extend their employees' FSA benefit period for up to 2 and a half months after the end of plan year. The intent of this ruling was meant to give employees additional time to spend their FSA funds, and incur new expenses.

However, employers can only offer either a carryover or a grace period for their FSA, so employees need to inquire with their benefits administrators and HR departments to learn the ins and outs of their flexible spending accounts.

Should I be concerned about the "Use it or Lose it" rule?

As a matter of course, employees should still be mindful of the "Use it or Lose it" provision, but in light of these recent IRS rule changes, it's less of a concern for FSA account holders and shouldn't scare away new enrollees. As long as FSA users are mindful of their payroll allocations throughout the year, spend their funds wisely, and check in with their benefits administrators, FSAs are easier than ever to help cover a huge range of qualifying medical products and services.

If you'd like to learn more about your FSA or purchase qualifying products, be sure to check out FSAstore.com! Visit the comprehensive FSA Eligibility List to explore what your account covers and browse through our huge selection of FSA-eligible products!

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