Flexible Spending Accounts: More Time to Spend

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The U.S. Treasury announced last week that millions of workers who use flexible spending accounts (FSAs) to set aside pre-tax dollars for health-care expenses will have until two and one-half months to spend the set-aside funds. Previous rules required that funds deposited in an FSA be spent by the end of the plan year. Any unspent funds were lost.

The use it or lose it rule isn't changing but savers are being given an additional 2½ months in which to spend it. If the plan year ends with the calendar year, spending can now continue until March 15. The change is intended to eliminate the end-of-year rush on services as savers try to spend the remaining balance in the FSA. It is still unclear whether the extension will accomplish that or just delay the rush until closer to the new deadline.

FSAs allow employees to pay for uncovered or unreimbursed medical expenses, including co-payments and prescription drugs, with pre-tax dollars. A similar plan allows employees to set aside funds for dependent care. Funds not spent during the period of either plan, now 14 ½ months, are forfeited. It will be left up to employers to adjust their plans to allow for the extended period.

"The new rule will give workers with FSAs more time to pay for medical and dependent care expenses and will ease the year-end spending rush prompted by the prior rule," stated Treasury Secretary John Snow. "Putting people back in charge of their own care is one of the most important things we can do to strengthen our health care system.”

Senator Chuck Grassley (R-IA), chairman of the Senate Finance Committee, has pressured the Treasury Department for months to make FSAs more attractive and useful to workers. Along with Senators Jim DeMint (R-SC) and Ken Salazar (D-CO), Senator Grassley supports legislation allowing up to $500 invested in an FSA to be carried over to the next year making FSAs easier for more people to use.

“Workers shouldn't have to lose money,” Senator Grassley told the Des Moines Register.

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