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 helpful, 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 unused 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 used 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 giving up 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 support the carryover to the at once
following year of up to $570 of any amount still being 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 choice.

Here are some things to remember:

• FSAs are employer options (cafeteria plans) offered to employees.
• Contributions to the 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 employees’ 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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