Make Your FSA Even More Flexible With a Carryover

November 12, 2014

Participants of a Flexible Spending Account (FSA) often scramble to spend the rest of their funds because of the IRS’ use-it-or-lose-it rule, which states that unused Flexible Spending Account balances at the end of the year are forfeited. That’s why you should consider including a carryover with your FSA offering. The IRS allows up to $500 to be carried over from a participant’s FSA from one year to the next. However, only 49 percent of our clients include a carryover with their Flexible Spending Account.

What does an FSA carryover mean for you?

You and your employees benefit from an FSA carryover. The extra incentive eliminates the need for employees to rush to spend their remaining balances at year, which makes election decisions easier for them. And a carryover should lead to increased Flexible Spending Account enrollment. That means tax savings for you, since the more they contribute to a Flexible Spending Account, the less you'll have to pay in payroll taxes.

$500 FSA Carryover Option

How do you add an FSA carryover?

FSA carryover rules stipulate that you can’t offer a carryover and grace period (which allows employees to incur services for up to an additional 2½ months past the plan end date) at the same time. If you aren’t offering a grace period, then you simply amend your plan to include an FSA carryover at any time on or before the last day of the current plan year, and the amendment would be retroactive to the start of the plan year.

If you’re offering a grace period but want to switch to a carryover, there are some considerations to keep in mind. An amendment to the plan indicating the desire to eliminate the grace period provision and to add the carryover option would be required no later than the end of the current plan year. Also, we recommend that you consult with legal counsel to determine if ERISA or state laws will conflict with the decision to eliminate the grace period for the current plan year.

Looking for additional tips on how to increase Flexible Spending Account participation? Check out our blog post on three easy ways to increase FSA enrollment.

Note: This post was originally published in November 2014. It was updated in March 2018.

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