The Internal Revenue Service has announced that it may eliminate the "use it or lose it" rule for health flexible spending arrangements (FSAs).
This announcement was made as the IRS released guidance concerning the $2,500 employee contribution limit to FSAs. The IRS requested comments on the possibility of changing or eliminating the rule, which could impact about 15 million Americans who participate in FSAs.
The rule, which requires employees to spend their contributions within a year or forfeit them, is one of the reasons many opponents do not like FSAs. Eliminating it could encourage a significantly larger number of people to pursue them, a change which could potentially occur rapidly as many employers offer such plans already, even if the percentage of workers who use them is limited.
Part of the reason this change is being considered now is because of the new cap on contributions. The rule was initially instituted in part to prevent people from using FSAs as a tax shelter, according to the National Journal. The limit on contributions serves the same purpose, and as a result some officials may be willing to scrap the rule. That could ease the financial burden on participants in a significant way, and have an even stronger impact on employee attitudes toward FSAs.
