Health FSA surrender rule

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.

The current rule

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.

• Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year. For example, an employee with unspent funds at the end of 2019 would still have those funds available to use in 2020.
• Under the grace period option, an employee has until two and a half months after the end of the plan year to incur eligible expenses. For example, March 15, 2020, for a plan year ending on Dec. 31, 2019.
• Employers can offer either option (not both) or no option.

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