Health FSAs Feature Carry-Over Option

Sometimes, leftovers can be more satisfying than when the meal was first served. You somehow appreciate it more, when you can enjoy something that wasn’t used up the first time.

Now, that satisfying carry-over feeling extends to Health Flexible Spending Accounts (FSA).

A Health FSA is an employer-sponsored account that employees can use to pay for or reimburse their qualifying medical expenses on a tax-free basis, up to the amount contributed for the plan year. Typically, Health FSAs are subject to a “use-or-lose” rule that generally requires any unused funds at the end of the plan year (plus any applicable grace period) to be forfeited.

As an exception to this use-or-lose rule, however, employers may allow participants to carry over up to $500 in unused funds into the next year to pay or reimburse medical expenses incurred during the entire plan year to which it is carried over. Also, the carry-over amount does not count toward the Affordable Care Act’s (ACA) limit on employees’ salary reduction contributions to a health FSA.

For this purpose, the remaining unused amount as of the end of the plan year is the amount unused after medical expenses have been reimbursed at the end of the plan’s run-out period for the plan year. For plan years beginning on or after Jan. 1, 2022, the limit on Health FSA carryovers increases from $500 to $570.

The IRS has provided the following rules for Health FSA carryovers:

  • A Health FSA may:
    • Specify a lower amount as the maximum (and has the option of not permitting any carryover at all);
    • Permit carryovers only if it does not also incorporate the grace period rule. The carryover may be used to pay or reimburse medical expenses incurred during the entire plan year to which it is carried over;
    • Limit the ability to carry over unused amounts to a maximum period (for example, a health FSA can limit the ability to carry over unused amounts to one year); and
  • A cafeteria plan is not permitted to allow unused amounts relating to a health FSA to be cashed out or converted to any other taxable or nontaxable benefit.

See how the Health FSA carry-over option can apply to your business and provide an added benefit for your employees. Contact the professionals at Evergreen for more information.

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Evergreen Insurance provides these updates for information only, and does not provide legal advice. To make decisions regarding insurance matters, please consult directly with a licensed insurance professional or firm.