May 25, 2005--The Treasury Department and the Internal Revenue Service announced that they will allow employees who take advantage of Flexible Spending Arrangements an additional two and a half months to spend their contributions.
Flexible Spending Arrangements (FSAs), sometimes known as "cafeteria plans," allow workers to contribute a portion of their salaries to a tax-free account, which can then be used to pay for health care expenses not covered by insurance. At the end of the year, anything left in the accounts reverts to the employer in the so-called "use-it-or-lose-it-rule," which critics say discourages workers from contributing to the accounts. With last week's rule-change, that deadline moves back to March 15 -- but employees will still have to use their contributions before the new deadline or forfeit them.
"One of the biggest problems with spending accounts is a fear factor," said Bonnie Whyte, president of the Employers Council on Flexible Compensation (ECFC), a trade association that promotes FSAs. She estimates that 20 million employees contribute to FSAs out of 100 million who have the option and hopes that the Treasury Department will one day do away with "use-it-or-lose-it" altogether.
Treasury Secretary John Snow said in a statement that the new "grace period" will make the system run more smoothly. "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," Snow said.
While FSAs have been around since the late1970s, they have received increased attention of late as a result of spiraling healthcare costs and President Bush's efforts to push Health Savings Accounts (HSAs), which allow individuals with high-deductible health plans to make tax-free contributions for future expenses. These accounts are not subject to the FSA deadlines and roll over from year to year.
Employers who wish to let their workers take advantage of the relaxed FSA deadline must amend their plan documents before December 31.