More Time May Be Allowed For FSA Expense Reimbursement
In an effort to improve the "use-it-or-lose-it" rule, the IRS issued Notice 2005-42
that allows employers to extend the deadline for Flexible Spending Account
(FSA) reimbursement for up to 2½ months after the end of the plan year.
FSAs allow employees to contribute pre-tax dollars to an
account to pay for medical expenses. Previously, participants were required to
use all funds by the end of the plan year.
This has encouraged many employees to go on a "spending binge" at the
end of the year to use up any unused balance that would otherwise be forfeited.
The new rule announced May 18, 2005, by the Treasury Department would ease those
rules that required the forfeiture of unused funds and allow for additional
time to submit expenses for reimbursement.
"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."
Under the IRS guidance, employers are permitted to amend
their plans to allow this provision prospectively so that participants can be
reimbursed for FSA and dependent care expenses
incurred up to 2 1/2 months after the close of the plan
year. If an employer plans to extend this provision, plan documents will need
to be amended prior to the end of the current plan year. This would
allow up to 14 ½months and 15 days for participants
to use their FSA contributions from the previous plan year, which should reduce
forfeitures. However, any unused funds
after that will continue to be forfeited.
Employees often feel skittish about their ability to predict
FSA-approved expenses. Rather than chance being wrong, employees will
frequently opt not to participate. But that practice can severely undermine the
tax saving employers and employees may realize through an FSA in the first
place. This new ruling could impact the
participation in FSA and provide employees with more control over their health
care expenses.
Infinisource will
continue to examine the provisions contained within the notice and the effects
these will have for employers who offer an FSA.
It is in the employer's best interest to not only establish
an FSA program, but to educate employees on the benefits and use of the
program. At Infinisource, we not only administer your FSA program, but we help
you educate your staff and maximize participation. If you would like more
information on FSA Administration and employee education, please contact us at
800-779-6384.
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