Imagine if you’d socked away money throughout the year so it’d be there when you needed it, only to see the portion of those funds you hadn’t gotten around to using simply disappear at year’s end. Would you be motivated to keep putting money into that account? Well, that’s a big reason why only 22 percent of eligible employees sign up for flexible spending accounts, even though 85 percent of large employers offer them, according to Alegeus Technologies, which administers platforms for tax-advantaged benefits accounts such as FSAs and health-reimbursement accounts.
Now, thanks to a rule change pushed by Alegeus and others, the U.S. Treasury Dept. has announced that employees with FSAs may roll over up to $500 of their unused funds at the end of the plan year. Previously, unused funds had to be forfeited — a “use it or lose it” rule that Alegeus says is a big reason why so few employees sign up for FSAs in the first place. Effective in plan year 2014, employers that offer FSAs will have the option of letting participants roll over unused funds — for employers that don’t offer so-called “grace periods,” the rule change takes effect immediately.
Of course, it’s employers that will be giving up that forfeited money (up to $500 of it, anyway) should they choose to let their workers roll over the funds. Some of that money covers the costs of employees who borrow against their FSAs to cover unexpected medical costs and then leave the employer before the funds are fully repaid. However, Alegeus and other companies that administer FSAs, such as WageWorks, say the rollover option will encourage many more employees to sign up for FSAs to guard against unpredictable out-of-pocket medical expenses. More than 70 percent of FSA participants are low- and middle-income workers, says Alegeus.