The Treasury Department is changing the rules on flexible health spending accounts to allow taxpayers to carry over $500 at the end of the year.
The new Internal Revenue Service rule ends the 30-year-old use-it-or-lose-it policy, which forced taxpayers to forfeit whatever unspent amount they had set aside for medical expenses at the end of the year.
Treasury Secretary Jacob Lew called the rule change “a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”
Flexible Spending Accounts are employer-sponsored accounts that allow employees to pay for out-of-pocket health expenses before taxes — expenses like copays, deductibles, prescriptions and eyeglasses. But under a 30-year-old tax rule, employees lose whatever money they didn’t spend by the end of the year. The employer gets to keep that money.
“Historically that has been a road block to getting more folks to take advantage of a flexible spending account to pay for their health expenses,” said Tom Torre, CEO of Alegeus Technologies, a benefits administration company that helps companies run the accounts. “We just think it makes a lot of sense.”
An estimated 14 million American families use the accounts, though only about 20 percent of those whose employers provide the benefit take advantage of it, according to Alegeus.
Estimating out-of-pocket expenses a year ahead of time can be a hassle for taxpayers. The IRS formerly allowed taxpayers to go on an end-of-year spend-down by stocking up on aspirin, bandages and other over-the-counter medications.
But the Affordable Care Act disqualified any purchase that didn’t have a doctor’s prescription, and limited the annual contribution to $2,500.
It’s still up to employers to decide whether to allow a carryover. Some employers could begin allowing a carryover as early as this year. Many employers already allow a grace period at the end of the year to give employees more time to spend down their accounts, but the Treasury Department said an employer cannot allow both a carryover and a grace period.