If you have a Medical Flexible Spending Account (FSA), you may have the ability to take leftover funds from one plan year and transfer them to the next. This plan feature (referred to the IRS as a “carryover”; also known as a “rollover”) gives you additional flexibility with your pre-tax funds and allows you to stretch that dollar even more. Does your plan have the FSA carryover feature? If so, here’s what you need to know:
1. What does it mean for FSA funds to “carryover”?
Let’s take a look at this example:
Let’s say on December 31, 2021, you have $300 left in your Medical FSA. The “use-or-lose” rule often associated with FSAs would mean that if that $300 isn’t spent before January 1st rolls around (unless your employer offers an extended grace period), the funds are forfeited.
Obviously, that’s not ideal. That’s why in 2013, the IRS modified the “use-or-lose” rule, which gives employers the option to allow participants to use up to $500 for qualified expenses in the following year. Back in 2020, that amount was increased to $550 and is now adjusted annually for inflation. These changes enable you to avoid the end-of-year rush to spend your pre-tax funds and give you peace of mind.
*IMPORTANT NOTE: The 2020 Year-End Spending Bill included a temporary provision allowing employers to amend the plan year-end for Medical and Dependent Care FSAs. Among the changes employers can make is to allow up to the full election amount for both of these accounts to carryover from 2020 to 2021 and 2021 to 2022, for instance.
Other FAQ’s regarding the carryover feature:
2. How do I know if my employer’s FSA plan has the carryover feature?
Go to the “Flexible Spending Accounts (FSAs)” section of your Plan Highlights. Any information regarding carryover limits (referred to as a “rollover”) will be under the “Claims for FSAs” section.
❓Need help finding your Plan Highlights? Get step-by-step instructions here.
3. Is there a minimum or maximum carryover amount?
Your employer sets the minimum or maximum carryover amounts. Not sure where to find this? Check your Plan Highlights!
4. Does the amount you carryover affect your maximum election amount in the subsequent plan year?
Any funds you carryover do not factor into the amount you can elect. This means you can elect the maximum amount allowed under your plan AND have additional funds you carry over from the previous plan year!
KEY POINTS
?The American Rescue Plan increased the dollar amount that employers can let employees put in their dependent-care flexible spending accounts for 2021.
?Separate legislation adopted in December 2020 allowed for increased flexibility for FSAs.
?The changes are not mandatory. Employers may choose whether or not to elect changes.
Want to learn more?
See our Frequently Asked Questions for FSAs.
