Treasury Gives Workers More Time To Spend FSA Funds
The U.S. Treasury Department and the Internal Revenue Service (IRS) have issued Notice 2005-42, which will allow employers to extend the deadline for employees to spend funds held in Flexible Spending Arrangements (FSAs) by up to 2½ months after the end of the calendar year.
Under section 125 of the Internal Revenue Code (IRC), an employee may make a commitment at the beginning of the year to contribute a set amount to an FSA, and the employer regularly deducts money from the employee's paycheck to place in the account. These pre-tax FSA contributions may be used to pay for child care or health care expenses not covered by insurance. Prior to this announcement, rules stipulated that employees forfeited any funds left in the FSA at the end of the year.
The rule change will not, however, allow employees to roll over unused FSA funds into the following year, and companies that sponsor FSAs will not be required to change their deadlines.
"The new rule will give workers with FSAs more time to pay for medical and dependent care expenses and will ease the year-end spending rush prompted by the prior rule," said Treasury Secretary John Snow. "Putting people back in charge of their own care is one of the most important things we can do to strengthen our health care system. That's why President Bush has made it a priority to make it easier to access and pay for care through FSAs and to encourage consumer driven health care initiatives such as Health Savings Accounts."
Members of Congress, most pro-minently Sen. Chuck Grassley (R-IA), chairman of the Committee on Finance, had been lobbying for the change, arguing that many employees were reluctant to sign up for the FSAs because of the "use-or-lose" provision that forced workers to spend all the funds in their accounts by the end of the year, or forfeit the money to their employers.
Commenting on the rule change, Sen. Grassley said, "This is great news for Americans struggling to keep up with rising health care costs. The so-called 'use it or lose it' rule has discouraged millions of Americans from using flexible spending accounts. It's caused millions more to waste or forfeit precious health care dollars. Workers shouldn't have to lose money just because they've been lucky enough not to have a health crisis. An artificial deadline doesn't make sense."
Grassley added, "I appreciate the Treasury Department's response to my request to take a fresh look at this decades-old rule and put the word 'flexible' back into these plans. Americans need every possible tool to meet their families' health care needs. I'm looking forward to working with President Bush and my fellow senators to make health care more affordable by further improving flexible spending accounts, and by continuing to build on the success of consumer-directed health plans such as health savings accounts."
