(Bloomberg Business) — The tax advantages of a flexible spending account are well known — they let you sock away as much as $2,550 of your pretax income for doctor bills and other medical costs. Those benefits, though, are offset by one big drawback: Any money unused gets handed over to the employer that administers the plan. That’s a bitter pill to swallow, and may explain why fewer than one in three people use an FSA.
It doesn’t have to be this way. In October 2013 the U.S. Department of the Treasury approved a rule to let workers carry over $500 in unspent FSA money from year to year. A small but growing number of companies has adopted the provision. As of now, Alegeus Technologies estimates about 20 percent of companies have done so, up from 8 percent in 2014, but they have until the end of the year to sign up. Benefits administrator WageWorks (which also provides services to Bloomberg employees) has been encouraging employers to make the change, and so far 40 percent of its 45,000 employers have signed up. “We’re seeing growing adoption every day,” says Jody Dietel, chief compliance officer at WageWorks.
As it is, every March, millions of people rush to use up their balances. Almost all medical care and prescription drugs are eligible, but over-the-counter drugs and other supplies are mostly excluded without a physician’s note. Exceptions abound on the government’s FSA website: Buying bandages, contact solution, reading glasses, or sunscreen can chip away at small balances. For big balances, eligible expenses include chiropractors, acupuncture, and eyeglasses. Online eyeglass seller Warby Parker warns that, to make the March 15 FSA deadline, all orders must be placed by 9 p.m. Eastern time on Friday, March 13.
Rollovers eliminate this last-minute rush, and that should encourage more workers to put money in FSAs in the first place. Employers offering rollover FSAs are already seeing a “double- digit” percent increase in enrollment, WageWorks says.
One reason employers could be hesitating to adopt rollover FSAs is a worry that it will cost them more. Any unspent FSA money goes to employers, who can use it to defray the cost of other employee benefit programs. But that’s not how the math works, Dietel says. By increasing FSA use, companies can save in other ways — for example, by reducing how much they’re paying on the employer portion of payroll taxes.
They also avoid a cost that’s hard to quantify, says Bruce Elliott of the Society for Human Resource Management: “demotivated, angry employees” who’ve overestimated their health care costs and are now about to lose their hard-earned money.