Friday, June 1, 2012

Don't use it? Don't lose it!

IRS Open to Comments on FSA Use-or-Lose Rule

by David Wetzler, Senior Business Consultant
It’s a fact. If you never use the muscles in your biceps, they’ll eventually disappear.   Use It or Lose It, as the saying goes.  With a little help from the IRS, however, the Use It or Lose It rule may not be a universal truth.
On May 30, 2012, the Internal Revenue Service issued Notice 2012-40 providing guidance on the $2,500 Health Flexible Spending Account (FSA) requirements. In the notice, the IRS requested comments on whether the "use-or-lose" rule should be modifed in light of the $2,500 limit. 
Currently, employees who participate in FSAs must estimate the amount of money they will need in the coming year to cover healthcare-related expenses not covered by their health plans.  They can stash away a maximum of $2,500 per year to pay for things such as  co-pays, deductibles, eye glasses, braces, etc. -  items not covered under their other insurance plans.  The money contributed to their Flexible Savings Accounts is tax exempt, thereby reducing the employee’s taxable salary.  That’s the good news.  But there’s a downside as well:  the Use-or-Lose requirement. Employees must accurately project what they think they will spend or lose the unspent amount in the account every plan year.
Not only does this rule inhibit employee participation, it creates spending behaviors in the last month of each plan year that may or may not be the best use of an employee’s money.  
So now’s your chance to let the IRS know what you think.  Written comments about the Use-or-Lose Rule are being requested by  August 17, 2012.   Refer to page 10 of Notice 2012-40 to find out how and where to submit your comments. 

For a summary of all the requirements on Notice 2012-40 regarding FSAs, check out Healthcare Reform on the SRA Benefits web site.  And contact an SRA Benefits consultant about how FSAs may be a great addition to your employee benefit plan offerings.

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