Treasury Loosens Rules on Health Spending Accounts

Prescription pill bottles against a background of dollar bills.

WASHINGTON -- Workers who take advantage of special tax-free accounts to pay out-of-pocket medical expenses could soon be allowed to carry over up to $500 from one year to the next.

For nearly 30 years, employees who were eligible to use the accounts had to forfeit any unspent money at the end of the year.

A new rule will now permit employers to let plan participants roll over up to $500, the Treasury Department said Thursday.

Employers who sponsor the plans, however, aren't required to offer the option.

Some plan sponsors may be eligible to start letting workers carry over the money at the end of this year, Treasury said in the announcement. Others may have to wait until next year to start offering the feature.

"Today's announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year," Treasury Secretary Jacob Lew said in a statement.

The accounts, known as flexible spending accounts, allow employees to contribute up to $2,500 a year directly from their pay, before taxes are deducted.
The accounts can then be used to pay certain medical expenses not covered by insurance, including co-pays.

Treasury says an estimated 14 million people use the accounts.

Employees generally decide how much to set aside in the accounts before the start of the year. But it can be difficult to estimate medical expenses a year in advance discouraging some people from taking advantage of the accounts.

Sen. Orrin Hatch, R-Utah, said: "Allowing Americans who have one of these accounts to roll $500 over to the following year just makes sense and will give people more help to pay for out-of-pocket health care costs."

"I'd like to see more done to expand these critical accounts that empower the individual to make informed health care decisions using money they saved," Hatch said.

Some plans currently provide workers with a grace period at the start of the year to spend the money in the accounts, up to 2½ months. The new rule says plans can offer either a grace period or the $500 rollover, but they cannot offer both.

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A little misunderstanding here. First, there is nothing new about HSAs. Health Savings Accounts went into law in 2002. Not everyone qualifies, however, as HSAs can only be established in conjunction with "high deductible" health insurance policies. As of 2011, drug withdrawals from an HSA are only allowed for prescribed expenses (same for FSAs). Previously one could use the funds for OTC medications. Second, FSAs are funded with pre-tax dollars so they reduce the out-of-pocket expense of healthcare by one's tax rate — keeping this really simple, if one was in a 20% tax bracket, a $1 post tax purchase would be $1.20: $1 for the purchase and 20¢ for the taxes paid on the income. This is a pretty significant saving. On the down side was the use-it-or-lose-it provision. If one did not spend all of the money is reverted back to the employer (NOT THE GOVERNMENT). Both HSAs and FSAs were only available to those who participated in employer sponsored group insurance programs. A lot of people have some fairly predictable healthcare expenses—on-going prescription drug requirements (e.g. medication for high blood pressure), corrective lenses (e.g. prescription glasses or contact lenses), chiropractic services that are not covered by a group policy, etc.—since FSA funds can be used for purchased healthcare services, co-payments, and prescribed products, they facilitate real cost savings. However, because of concerns similar to those expressed by charpist5, below, folks tended to ignore or underfund FSA accounts. The new "rollover" provision should encourage more people to take advantage of the programs. Even better, it would be nice if this was extended to a perpetual, unlimited, rollover. In this event, one could build up a healthcare "nest egg" if one were so inclined. Hope this helps.

November 01 2013 at 11:40 AM Report abuse rate up rate down Reply

charpist5-the dollars put in FSA account are also exempt from FWT
where as money spent on medical is deductible only after 7.9%
makes a large difference in our taxes!

November 01 2013 at 11:23 AM Report abuse rate up rate down Reply

First of all, I thought these FSA things were dead now under Obamacare. Second, who in his right mind would EVER "contribute" ANY money for such a thing when he would likely lose it at the end of the year? That is just NUTS. Want a flexible spending account? Take everything in your paycheck, spend some of it more wisely, and put the rest of it away. You will have your own flexible spending account, and, at least as of today, the government won't take ANY of it away from you if you don't spend it.

November 01 2013 at 8:13 AM Report abuse +1 rate up rate down Reply
2 replies to charpist5's comment

fsa works great when you have known prescription costs /co-pay etc per year and don't have to worry about keeping money asisde for it.

November 01 2013 at 9:47 AM Report abuse rate up rate down Reply

The maximum amount that could be set aside was $10,000.00 until 2012. It helped people with chronic medical conditions be able to get a little help without having to meet the 7.9% of AGI. My daughter is deaf and her ongoing out of pocket medical expenses total about 11,000 to 12,000 per year. If she has an illness or has to have tests, that goes on top of the 11,000 to 12,000 per year. In order to get the affordable care act to pass, the FSA was reduced to $2500.00 this is effectively a $1500.00(20% tax rate) tax hike for the deaf, blind, diabetic, etc.

November 01 2013 at 11:57 PM Report abuse rate up rate down Reply

There is a newer updated program called HSA. Health Savings Account. Lets you save up $3300 per year and roll it ALL over if you wish. Also, if over 55 you can add an extra $1000 per year in this saving account. If you have over $2000 saved you can begin investing the extra and collect tax free interest as well. Much better program.

November 01 2013 at 8:05 AM Report abuse rate up rate down Reply
1 reply to's comment

Let people when they are young and healthy start their HSA, and keep adding to it as it also rolls over then could have the option of carrying just a catostrphic plan when early on and pay a negotiated cash price for their check ups, etc.

November 02 2013 at 3:41 AM Report abuse rate up rate down Reply