A Flexible Spending Account (FSA) carryover is one way you can provide flexibility to employees who participate in these accounts.
What is an FSA carryover?
An FSA carryover lets participants carry up to $550 (indexed annually, per IRS rules) from one Plan Year to the next. In general, an FSA carryover typically applies to only Health Care FSAs (HC FSA), though under temporary rules in place though 2021, a carryover can be available for Dependent Care FSAs (DC FSA) as well.
Who determines the HC FSA carryover amount?
The employer determines the amount of the carryover (up to the IRS limit).
The CAA and the carryover
The Consolidated Appropriations Act (CAA), 2021 provides even more relief (albeit temporarily) for HC FSA participants. Under the CAA, you are allowed, but not required, to permit the following for either or both of HC FSAs and DC FSAs:
- Carryover of all unused funds from plan year ending in 2020 to Plan Year ending in 2021.
- Carryover of all unused funds from plan year ending in 2021 to Plan Year ending in 2022.
Perks for your participants
The ability to carry over HC FSA funds gives your participants peace of mind. HC FSAs are governed by the IRS’ use-or-lose rule, which requires that any funds in an HC FSA must be spent by the end of the Plan Year or else be forfeited to the plan. Offering the maximum allowed $550 carryover lets your participants carry up to $550 from their current Plan Year to the next plan year. And, if permitted under your plan, your participants can carry over all HC FSA funds from a plan year ending in 2021 to 2022 under the CAA.
By providing them with more flexibility, your participants might be more likely to participate in your HC FSA year after year, allowing you and them to save more money.
The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own counsel.