Big Change to Flexible Spending Accounts

Employers can now allow you to carry over up to $500 in your account from one year to the next.

I have to decide how much to contribute to my flexible spending account for next year. What’s the maximum I can contribute to my FSA in 2014?

FSAs now limit employees’ annual contributions to no more than $2,500 per year, a change that took effect in 2013. But the Treasury Department and IRS recently made another big change to flexible spending accounts, which allow you to pay medical bills with pretax money. In the past, you would lose any money in the account that you hadn’t used by December 31 (or March 15 of the following year, if your employer offered a grace period). This use-it-or-lose-it provision scared off some people from participating in FSAs and prompted some people who did have accounts to make last-minute dental or eye doctor appointments they didn’t really need.

The Treasury Department and IRS changed the rules so employers can allow people to carry over up to $500 in their accounts from one year to the next. Employers can choose to make this change before the end of 2013, but they aren’t required to offer the carryover. They can continue to offer the March 15 grace period instead or offer neither option -- but they can’t offer both the $500 carryover and the March 15 grace period.

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Joe Jackson, CEO of WageWorks, which administers FSAs for employers, expects that many employers who don’t currently offer grace periods will adopt the $500 carryover right away, but he says that employers currently offering grace periods are likely to wait until 2014 to switch to the carryover. It may be difficult for some employers to make this change in time for 2013. They would have to amend the plan before the end of the year and provide sufficient notice, and there may not be enough time given the legal requirements, says Steve Wojcik, vice-president of Public Policy for the National Business Group on Health, a health benefits organization of large employers.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.