Flexible Spending Accounts (FSA) are offered by many US employers as part of their health care benefit plans. The Treasury Department and IRS in a recent notice indicated that they were considering modifying the use it or lose it rule. They have requested comments on “whether the proposed regulations should be modified to provide additional flexibility with respect to the operation of the use-or-lose rule for health FSAs and, if so, how any such flexibility might be formulated and constrained.” Comments must be submitted by August 17th, 2012 and may be submitted via email to Notice.email@example.com with “Notice 2012-40” in the subject line of the email message.
FSAs allow workers to set aside pre-tax earnings to pay for approved healthcare expenses such as doctor visit co-pays and braces. Recent rules have restricted the use of FSAs for over-the-counter drug reimbursements and limited contributions to $2,500 per year. A long-standing but controversial rule associated with FSAs was that employees had to spend all their FSA funds in the year or forfeit them back to their employer. Originally, this rule was enacted to discourage using FSAs as a tax shelter. However, with the new $2,500 per year limit, the use it or lose it rule may no longer be necessary.