By John L. Duoba, CCH Financial Planning Toolkit Staff Writer
Flexible Spending Arrangements (FSAs) are popular employee benefits because they allow workers to pay for medical expenses with pre-tax dollars, making their buying power stretch. One downside, though, is that the money must be earmarked ahead of time, and estimating future medical expenses is not easy to do.
And complicating the matter is the use-it-or-lose-it aspect of these accounts: Any unspent funds (which are, after all, wages you earned) are forfeited. So a balancing act results--taking advantage of the tax break vs. losing the money and defeating any advantages from the tax break.
To avoid the loss of income, many employees often end up going on spending sprees to stock up on medical items that would be needed in the future, like eyeglasses, basic medicines and supplies, etc.
But thanks to a new ruling by the Treasury Department and the Internal Revenue Service, you may not need the year-end spree, or at least you might be able to delay it a little.
No, the use-it-or-lose-it aspect is not going away for these benefits. But you now have more time to spend down those accounts before losing them.
Employers are now allowed to modify their FSA employee benefits to extend the deadline for reimbursement of health and dependent care expenses up to 2 1/2 months after the end of the plan year, according to new guidelines issued by the Treasury Department and the Internal Revenue Service.
Under the new rules, expenses for qualified benefits incurred during this 2 1/2-month grace period may be paid or reimbursed from benefits or contributions that were unused at the end of the plan year. Then, any unspent funds are forfeited at the end of the 2 1/2-month grace period.
This new ruling is doubly beneficial to employees because of added flexibility. The knowledge that your unspent funds from the previous year are still available for a portion of the new benefit year may influence your thinking on how much to set aside for that new year. This gives the employee the opportunity to be more efficient with their spending dollars, avoiding the inefficiencies and overspending inherent in the old system.
"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," stated 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."
FSAs allow employees to pay for uncovered or unreimbursed medical costs with pre-tax funds. FSAs are different than Health Savings Accounts (HSAs), which allow individuals and families with high-deductible health care plans to set pre-tax money aside for health expenses. Unlike an FSA, which must be spent within a certain period of time, HSAs can be rolled over from one year to the next.
The use-it-or-lose-it aspect of FSAs are required by a law that generally prohibits deferring compensation by means of a cafeteria plan (benefit plan using pre-tax dollars). A plan that permits employees to carry over unused elective contributions or plan benefits from one plan year to another is a form of deferred compensation; therefore, employee plans generally require that unused contributions or benefits remaining at the end of the plan year be forfeited under a "use it or lose it" provision.
- Related items:
- CEA Report Examines Tax Reform Options, Predicts Sustained U.S. Economic Growth
- Debate Continues Over Social Security Reform Issues
- Congress's Legislative Agenda Takes Shape
- New Tax Laws Bring Year-End Planning Opportunities
- FICA Tax Threshold, Social Security Benefits Will Moderately Increase
- Congress Approves New Tax Cuts Geared Toward Businesses and Individuals
- Congress Extends Individual and Business Tax Cuts; Adds New Tax Relief
- Congress Moves To Make Some Tax Cuts Permanent
- Prepare Now for Next Year's Tax Season
Added to the news on May 20, 2005.
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