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Carryover Option for Health Flexible Spending Arrangements (FSA)

by | 52 tax Tips and Weekly Financial Blog for 2023

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As, they say health is wealth! So even in matters of wealth, health gains some prominence. The IRS offers some
carryover to health flexible spending arrangements (FSAs). The carryover can be advantageous, but like all IRS
rules this one is complicated. There are some important limitations you need to know before taking advantage
of a Health Flexible Spending Arrangement.

Nancy, a Human Resources (HR) professional knows that employers may allow plan participants to carry over
up to $500 of their unused health FSA balances remaining at the end of a plan year, to the next year. But you
must also understand, this choice or feature is not mandatory for an employer, it is optional. It is also an
alternative to offering a grace period (waiting period), as many employers already do. Employers can offer the
carryover, the grace period, or nothing.

Health FSAs are common benefits under employer-sponsored cafeteria plans. A health FSA may be credited or
funded with employer contributions or pre-tax employee salary reductions. Health FSA dollars can be used for a
variety of qualified medical expenses including, but not limited to, the cost of chiropractors, dental or vision
expenses, over-the-counter medicines or drugs if a prescription has been obtained. Amounts in a health FSA at
the end of the plan year generally cannot be carried over to the next year. This is known as the “Use it or lose it”
rule.

In 2013, the IRS noted that health FSAs were not utilized to their fullest extent because the use- or-lose rule was
the greatest hurdle. Many taxpayers cannot predict their future needs for medical expenses and are reluctant to
open a health FSA for fear of forfeiting the unused funds. Moreover, in 2017, the Affordable Care Act put a
$2,600 cap on allowable annual contributions, further stressing participants to manage their FSA dollars
carefully. So, the IRS announced a change to the use-or-lose rule in 2013.

For 2023, an employer may amend its cafeteria plan to provide for the carryover to the immediately following
year of up to $570 of any amount remaining unused as of the end of the year in a health FSA. The carryover
does not count against or otherwise affect the $3,050 salary reduction limit, adjusted for inflation, for health
FSAs applicable to each plan year.

The IRS set $570 as the maximum carryover amount, for 2023. As mentioned earlier, an employer also may
choose to do nothing and not offer the carryover option.

Here are some things to remember:
● FSAs are employer options (cafeteria plans) offered to employees.

● Contributions to FSA can be made by either or both, employees and employers.

● Contributions made to an employee benefit plan are tax free.

● Money used by FSA accounts is for medical, dental or vision expenses.

● Employees that use FSA accounts must use or lose the amount contributed to the plan by year end or lose
the money left over.

● There is an exception that allows up to $570 of money in employee’s Accounts to be carried over to the next
year.

 

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

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Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.

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