Try as we might, life is hard to predict — and so are our expenses.  Surprises happen, sicknesses turn up and health care expenses—well, they can change quickly.  That’s part of the reason the “use-or-lose” provision for health care flexible spending accounts (FSAs), which forces account holders to spend down their accounts by the end of the year or face losing the money, has been so unpopular. 

But, the times, they are a changin’ (hope the lyrical reference isn’t lost on folks).

Last week, the IRS issued new guidelines for FSAs under the Patient Protection and Affordable Health Care Act and requested comments on whether to modify the “use-or-lose” rule.  That’s good news for the millions of Americans who use tax-advantaged accounts to cut down expenses on health care as well as for benefits managers and administrators of tax-advantaged accounts like my company, WageWorks.

The “use-or-lose” provision was originally designed to make sure FSAs, which allow participants to set aside pre-tax dollars for various eligible expenses, wouldn’t be improperly used as tax shelters.  Since the new health care law caps health care FSA contributions at $2,500, this original purpose of “use-or-lose” is invalid. Instead, “use-or-lose” has created a system which forces account holders to spend down their balance at the end of their plan year and simultaneously deters potential account holders from enrolling for fear of losing unused funds.   As I have argued before, it’s time for the “use-or-lose” provision to go, and I’m encouraged by the government’s request for comments.

In addition to offering some hope to opponents of “use-or-lose,” the IRS guidelines also provide some clarity to FSA users and benefits managers on the newly imposed $2,500 cap.  Here are some of the key takeaways from the guidelines that will help FSA users make the most of their accounts:

  • It is effective for plan years starting on or after January 1, 2013 and applies to the plan year
  • Employer contributions do not count generally toward the $2,500 limit
  • Any grace period amounts carried from 2012 into 2013 do not count toward the limit
  • And, it’s a participant and plan limit. A husband and wife both working for the same employer can each have $2,500. Additionally, an employee working for two non-related employers can have a $2,500 Health FSA at each employer.

These new guidelines are a welcome sight, but an end to “use or lose” would be a complete game changer, finally removing the incentive for wasteful spending and eliminating the most frustrating aspect of these accounts.