Use-it-or-lose-it is no more.

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The U.S. Department of the Treasury and the IRS on Oct. 31issued a notice modifying the longstanding “use-or-lose” rule forhealth flexible spending arrangements. Participants now can carryover up to $500 of their unused balances remaining at the end of aplan year.

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The rule will go into effect for the 2014 plan year.

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Effective immediately, employers that offer FSAs that don'tinclude a grace period will have the option of allowing employeesto roll over up to $500 of unused funds at the end of this planyear.

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An employer cannot offer a FSA carryover provision and an FSAgrace period at the same time, officials said.

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For nearly 30 years, employees eligible for FSAs have beensubject to the use-it-or-lose-it rule, meaning any account balancesremaining unused at the end of the year are forfeited.

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FSAs allow employees to contribute pre-tax dollars to pay forout-of-pocket health care expenses—including deductibles,copayments, and other qualified medical, dental or vision expensesnot covered by the individual's health insurance plan.

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Health savings accounts, on the other hand, are similarvehicles, but allow participants to build up savings over time.

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The move, the departments announced, is making “FSAs moreconsumer-friendly and provide added flexibility.”

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“Across the administration, we're always looking for ways toprovide added flexibility and commonsense solutions to how peoplepay for their health care,” Treasury Secretary Jacob Lew said in astatement. “[The] announcement is a step forward for hardworkingAmericans who wisely plan for health care expenses for the comingyear.”

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The change responds directly to more than 1,000 public commentsthe Treasury fielded. Employers and employees complained about thedifficulty for employees to predict future needs for medicalexpenditures. Many FSA users said they scrambled at year end tospend the remaining amounts, often buying unnecessary medicalsupplies.

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IRS officials said they believe a $500 rollover cap isappropriate because most employees who lost money under the rulelost far less than that amount.

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Bob Natt, executive chairman of Alegeus Technologies, a healthand benefits payments firm, said he's grateful the administrationhas “eliminated the most significant barrier to FSAparticipation—namely consumers' fear of losing their money.”

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He said that though more than 85 percent of large employersoffer FSAs, only about 20 percent of eligible employees actuallyenroll, mainly for “fear of forfeiting unused funds at the end ofthe plan year.”

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“With this new provision in effect, there is really no reasonfor eligible employees not to enroll and contribute to an FSA,”Natt said.

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Alegeus Technologies has been lobbying for four years to modifythe use-it-or-lose-it provision, he said.

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Wageworks, a benefits management provider of consumer-directedbenefits, also has been pushing the administration for flexibilityon FSA provisions. The company's CEO, Joe Jackson, said it's a very“positive change” and a long time coming.

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The rule will have far-reaching effects: An estimated 14 millionfamilies participate in FSAs.

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Under the Patient Protection and Affordable Care Act, the amountan employee can set aside in an FSA dropped to $2,500 this year.The $500 carryover won't reduce the $2,500 maximum a worker cancontribute to a FSA each year, Treasury officials said.

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