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Health Flexible Spending Account (FSA) Rules Now Allow a $500 Rollover

If you are employed, the months of October and November are generally the times when you have to make decisions about deductions from your paycheck for the next calendar year. One of the plans offered to you may be a Health FSA. In the past you may have decided to decline to participate at all or to put in a small amount in the Health FSA because of the “use it or lose it” rule.  This rule provides that any funds in the Health FSA at the end of the calendar year were forfeited if not used. Employers were allowed, but not required, to offer a 2½-month grace period after the end of the year during which you could incur eligible expenses and submit these expenses to use up any balance in your account left over from the previous year.

Rollover of up to $500 now allowed

Under a new rule effective in 2014, you can now rollover up to $500 at the end of a calendar year in a Health FSA that can be used anytime in the next calendar year. Employers are not required to adopt this new rule so check with your employer if the rollover is allowed. An employer cannot offer both the rollover of the $500 and the 2 ½- month grace period explained above.

Why participate in a Health FSA?

In 2014 you can elect to contribute up to a maximum amount of $2,500 in the Health FSA. The benefits of using the account are

  • No payroll taxes or income taxes are deducted from your contributions.
  • If your employer makes contributions to your account, those amounts are also not subject to taxes.
  • Withdrawals are tax-free if you pay for qualifying medical expenses, such as your out-of-pocket health care, dental and vision expenses.
  • If you put $2,500 in the Health FSA and your payroll taxes and income taxes amount to 40% of your pay, you have saved $1,000 in taxes.

What is the difference between a Health FSA and a Health Savings  Account (HSA)?

A HSA is only available to you if you participate in a high-deductible medical plan through your employer. If you participate in a HSA, your Health FSA expenses will likely be limited to dental and vision expenses. Please see Phil Gagliardi’s blog dated May 2, 2014 and a follow-up blog dated August 22, 2014 for more information about HSAs.

What contribution to make for 2015 in a Health FSA?

If your employer has adopted the new rollover rule you may want to calculate your 2015 contributions to your Health FSA based upon a projection of known expenses to be incurred in 2015 plus $500 for unknown expenses. If you do not use  the $500 you can roll it over to 2016 and still contribute the maximum amount for 2016.