Throughout the year, employees use FSA funds for co-pays, deductibles, and other qualified medical expenses not covered by their health plan. The IRS applies a Health FSA surrender rule to unused FSA balances at the end of the year, with three options available to the employer.
The IRS has always imposed a use-it-or-lose-it rule on the Health FSA to prevent abuse of the plan’s generous tax savings. In 2005, rules were changed so that employers may extend to employees a grace period of 2-1/2 months into the next plan year and, in 2013, so that employers could allow a roll-over of up to $500 into the next plan year.
From IRS: Eligible employees can use tax-free dollars for medical expenses
Under the FSA use-or-lose provision, participating employees normally must incur eligible expenses by the end of the plan year or forfeit any unspent amounts. However, employers can, if they choose to, offer an option for participating employees to have more time to use FSA money.
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