In time for open enrollment, the Internal Revenue Service (IRS) is reminding employers and employees of the health flexible spending account (FSA) limit for 2018.
An employee who chooses to participate in an employer’s FSA can contribute up to $2,650 during the 2018 plan year—a $50 increase over 2017. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.
Under the use-it-or-lose-it provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.
In IRS Notice 2013-71, regulators modified the FSA use-it-or-lose-it rule to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule. The grace period rule permits participants to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to two and a half months following year-end. Employers can offer one option only—not both.More information about FSAs can be found in IRS Publication 969.