Does FSA Account Rollover?

Flexible Spending Accounts (FSAs) are a popular tool for employees to save pre-tax dollars for eligible healthcare expenses. However, one of the most frequently asked questions by FSA account holders is whether they can roll over unused funds from one plan year to the next. In this comprehensive guide, we will delve into the nuances of FSA rollovers, including how they work, recent changes that affect rollovers, and strategies to maximize your FSA benefits.

Understanding FSAs

Before diving into the specifics of rollovers, it's essential to have a solid understanding of how FSAs operate.

Flexible Spending Accounts allow employees to set aside a portion of their earnings before taxes to pay for certain out-of-pocket healthcare costs. These costs can include copayments, deductibles, prescription drugs, dental and vision expenses, and more. Because the money is deducted from gross income, FSAs help reduce taxable income, resulting in tax savings.

Key Characteristics of FSAs:

• Pre-tax Contributions: Money contributed to an FSA is deducted from your paycheck pre-tax, reducing your overall tax liability.
• Employer-Sponsored: FSAs are typically offered by employers as part of their benefit package, and not all employers provide them.
• Eligible Expenses: Expenses must qualify under IRS regulations to be payable by FSA funds.
• Use-It-or-Lose-It Rule: Traditionally, any unspent FSA funds by the end of the plan year are forfeited.

The Use-It-or-Lose-It Rule

Historically, FSAs were governed by the "use-it-or-lose-it" rule, meaning that any unspent money in your account at the end of the plan year would be lost. This often led to a rush at the year's end as employees scrambled to spend their remaining FSA funds. However, recent adjustments have provided additional flexibility.

FSA Rollover Options

In response to the loss of funds due to the traditional use-it-or-lose-it rule and to improve the attractiveness of FSAs, the IRS has permitted two options to reduce the risk of forfeiting unspent balances: the rollover option and the grace period provision. Employers may offer one of these options, not both, or choose neither.

1. Rollover Option

Under the rollover option, employers may allow employees to carry over a specified amount of unused funds to the next plan year. As of 2023, the IRS permits FSAs to roll over up to $610. This amount is subject to change, so it's important to check for updates annually.

Key Points About FSA Rollovers:

• Employer Discretion: It is up to the employer to decide if a rollover is offered. Not all FSAs will provide this benefit.
• Rollover Limit: The rollover amount is capped, meaning any funds exceeding this limit are forfeited.
• No Impact on Contributions: The rollover amount does not affect the following year's contribution allowance. Employees can still contribute the maximum limit in addition to any rolled-over funds.

2. Grace Period Provision

Alternatively, some employers may offer a grace period, which allows employees an additional 2.5 months after the end of the plan year to incur eligible expenses and use remaining FSA funds.

Key Points About Grace Period:

• Extended Spending Timeframe: Employees get extra time to use their FSA money, which can alleviate some of the pressure at the year-end.
• No Rollover: Unlike the rollover option, funds not used after the grace period aren't carried over and are forfeited.
• Employer's Choice: Employers can offer a grace period or a rollover, not both, making it crucial to understand which option your employer provides.

Comparing FSA Rollover and Grace Period

To better understand the differences, here is a comparison table highlighting the core aspects of each option:

Maximizing Your FSA Benefits

Understanding the rollover and grace period opportunities allows you to plan better and maximize your FSA benefits. Here are some strategies:

1. Understand Your Employer's Policy: Always confirm whether your employer offers a rollover, grace period, or neither. Stay informed as these options can affect your year-end planning and financial estimates.

2. Estimate Expenses Accurately: At the beginning of the plan year, carefully estimate your eligible medical expenses. Consider upcoming medical appointments, prescriptions, and potential emergencies to ensure you're neither over-contributing nor underestimating your needs.

3. Check Eligible Expenses: Make sure you're aware of all eligible expenses your FSA can cover. This not only includes obvious items like doctor visits and medications but also over-the-counter products and specific health-related services.

4. Plan End-of-Year Spending: As the year progresses, review your remaining FSA balance and plan end-of-year spending if needed. This could involve scheduling routine check-ups or purchasing eligible healthcare products.

5. Communicate with HR: Maintain open lines of communication with your employer's HR department. They can provide the most current information on your FSA and its features.

Frequently Asked Questions

Can I roll over more than $610 in my FSA?

No, the IRS caps the FSA rollover amount at $610. Any amounts exceeding this limit are forfeited if not used within the plan year or grace period, if applicable.

How does an FSA rollover affect my contributions?

The amount rolled over does not impact your ability to contribute the maximum amount allowed by the IRS for the next plan year. You can contribute up to the full limit in addition to any rolled-over funds.

What happens if my employer offers neither rollover nor grace period?

If your employer opts not to provide a rollover or grace period, traditional use-it-or-lose-it rules apply, and any unused funds by the plan year's end are forfeited.

Conclusion

Deciding between whether to focus on using all your FSA funds by the end of the year or taking advantage of rollover and grace period options is instrumental in maximizing your healthcare savings. These decisions should always be informed by your specific healthcare needs and your employer’s provided benefits. Whether you can roll over your FSA funds or not depends greatly on your employer's choices, thereby emphasizing the importance of understanding your available options. Stay proactive and engage with your HR department to optimize your FSA's full potential.