If you have a Flexible Spending Account (FSA) then you’re probably aware of the use-it-or-lose-it rule. In short, you can set aside pre-tax funds to cover out-of-pocket medical expenses, but unspent funds are lost at year’s end.
The good news is that many employers give their employees until March 15th of the following year to spend down their balance. If you have a remaining balance, hopefully your employer gives you this flexibility.
But you have to act fast! March 15th is less than two weeks away. If you don’t, you’ll risk joining the ca. 50% of FSA participants who forfeit an average of $75 each in unspent FSA funds.
If you hate this rule as much as I do, then you’ll be pleased to know that Congress has considered changing the rules. That’s the good news. The bad news is that the relevant legislation was introduced a year ago and has gone nowhere.
According to OpenCongress.org, the Medical FSA Improvement Act of 2011:
Amends the Internal Revenue Code to allow amounts in a flexible spending arrangement (FSA) that are not spent for medical care to be distributed to the FSA participant as taxable income after the close of a plan year (currently, such unspent amounts are forfeited). Includes such FSAs in the definition of tax-exempt cafeteria plans.
Another reasonable alternative would be to let people carry the funds over to the next year while reducing their contribution limit by an equal amount. This could admittedly get complex with open enrollment happening before the end of the year but it wouldn’t be impossible to implement.
Alternatively, the IRS could simply let people deduct expenses up to the FSA limit, and do away with FSAs entirely. Is it just me, or does it seem like FSAs add an unnecessary layer of complexity and expense?
Regardless of what happens in the future, consider yourself warned. In just under two weeks, any money left in your medical FSA will evaporate into thin air.