Starting in 2013, it’s permissible for employers to allow employees to carry over up to a maximum of $500 in FSA funds from year to year (see “SECOND OPINIONS: Carryovers of Unused Health FSA Balances”). This amends the portion of the law commonly referred to as the “use it or lose it” provision. Previously, an employee with funds left in his or her FSA at the end of the year forfeited the money back to the employer. This provision created an end-of-year rush to squeeze in doctor appointments, get treatments, and figure out other ways to find qualifying expenses. The rule change makes FSAs potentially far more attractive to employees, which translates to heightened interest from employers.
It seems the IRS is intent on making FSAs more viable. This rule change was preceded by another in 2005 where the agency instituted a provision allowing for a grace period for employees to utilize their FSA funds. The two-and-a-half month grace period at the end of the plan year gave employees an extra 75 days to use FSA funds. It’s up to employers to decide whether to include the provision in their plan. Some employers adopted it, but interestingly many did not.
This recent change to the FSA legislation has received a great deal of attention from the press and the public. As a result, it has benefits managers talking, although they aren’t necessarily jumping to make the switch. A recent survey showed that while 80% of employers find the new rollover provision more compelling than the grace period, most of them are going to wait until at least next year before they decide to change their FSA plans. It is important to note that the new provision does not allow an employer to offer both the rollover and the grace period, which means they’ll have to make a choice. Of course, they may choose to offer neither.That might seem fairly straightforward, but hold on just one second. It gets a little more complex when we add another layer—health savings accounts (HSAs). They’ve become popular in the face of rising health care costs and declining retiree medical benefits, as many employers have embraced the idea of providing employees with as many savings options as possible to pay for future health care costs.
I know what some of you are thinking: So what? You can’t use HSAs and FSAs in tandem. It’s prohibited. However, that’s not completely true. Limited purpose FSAs, which were introduced in 2003 and cover dental and vision qualifying expenses only, can be utilized together with HSAs. However, the introduction of the new carryover provision and how it interacts with HSAs needs additional guidance from the IRS.
For example, if an employee who’s currently enrolled in a traditional FSA plan chooses to rollover $500, but at the same time changes the benefits plan to a high deductible health plan with an HSA, will the rollover disqualify them from opening an HSA account, or will they be allowed to rollover the money into a limited FSA or the HSA? The IRS seems concerned with creating a mechanism that enables people to build a cache of money that’s non-taxable, so the agency has multiple factors to consider before addressing these issues.
If you’re a benefits manager, the good news is that there’s more flexibility than ever before, which should lead to greater employee satisfaction. Now you can design the right plan at the employer level to increase participation at the employee level. However, plan design is only the beginning. More than ever before, the strategies used to introduce and educate employees about changes of this nature will have a significant impact on the final outcome. To maximize enrollment, successful employers have used different types of communication mediums with an increased frequency leading up to the enrollment period.
There is no cookie cutter solution to a design plan that fits the needs of every employer/employee dynamic. The right plan is dependent upon specific workplace culture and the benefit needs of the employee population. It requires knowledge and clarity in order to build a strategy that works.
By Tim Hayden, Regional Vice President, Corporate Synergies
Corporate Synergies is a national group employee benefits insurance. Tim Hayden is a health care executive with more than 25 years of sales and marketing experience in all phases of the employee benefits industry. He has earned an industry-wide reputation as a creative developer of benefits solutions. He has overall management responsibility for a team of benefits professionals serving Maryland, Washington, D.C., and Virginia.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.