Human Capital & Careers

Companies Lukewarm on FSA Carryovers

Employers have mixed reactions to federal tax rules that permit employees to carry over unused money in their flexible spending accounts from year ...
Stephen TaubAugust 15, 2005

Flexible spending accounts (FSAs) allow participants to pay their medical bills and dependent-care expenses with pretax dollars — but at the end of each year, participants forfeit any unspent money in their accounts. Critics have complained that the risk of forfeiting money has discouraged many individuals from participating in FSAs; those who do participate, add critics, frequently contribute far less than they eventually spend.

A better-known result of the “use it or lose it” rule is the year-end ritual in which FSA participants go on shopping sprees and buy goods and services that they otherwise wouldn’t, simply to avoid leaving money in their accounts. In response, the Department of the Treasury and the Internal Revenue Service issued guidance in May permitting (but not requiring) companies to offer a two-and-a-half-month grace period at the beginning of each calendar year. During the grace period, employees could incur eligible expenses that could be paid from the previous year’s FSA contributions.

But in a survey of 318 U.S. employers — 97 percent of which offer both a health-care and a dependent-care FSA — only half plan to offer the grace period for health-care spending; only 34 percent will offer it for both health-care and dependent care expenses. The survey was conducted by the Deloitte Center for Health Solutions and the ERISA Industry Committee.

Among the reasons given by survey participants for not offering the grace period: tracking account balances for two separate plan years simultaneously; coordinating the grace period with their run-out periods; forfeitures have not been a significant problem for FSA participants; explaining the grace period to participants would be difficult; and participants would not be able to fund a new health savings account (HSA) during the grace period.

Regarding a grace period for dependant-care FSAs specifically, many respondents said that those expenses are more predictable than health expenses, so the grace period is not needed to prevent forfeitures. Many also worried about creating inadvertent tax problems for dependent-care FSA participants or W-2 reporting problems for themselves.

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