It’s about that time again when you have to make choices about your employee health benefits for 2014. The IRS announced a change to their Use-or-Lose rule that you forfeit unused money in your healthcare flexible spending account (FSA): there is now the option of a $500 carry-over for the entirety of the next year.
Of course, there are strings attached.
- Your employer needs to accept this change and amend the documents of your health plan.
- Accepting the new change means the common grace period must be dropped.
Normally there is a two-and-a-half month period that follows the end of your plan year where you can spend that unused money in your FSA. This new rule would broaden that period to the whole year, but only $500 of that money can be used.
It therefore becomes a guessing game of expenses—if you have $800 leftover at the end of the year, you could use all of that in the following 2 ½ months. But what if you don’t need the money until six months later, when the bill for that root canal arrives? You’ve still got the $500, but you’re out $300.
The possibility of underestimating your needs makes it hard for you to maximize your tax break, since the money you put in an FSA account is pre-tax salary deferral. On the other hand, you may find that $500 coming in handy later down the road (as long as your employer agrees to the change and the amount).
Ted Lanzaro is the founder of Lanzaro CPA, LLC, a boutique tax consulting firm specializing in small businesses and the real estate and construction industries. For more information about CPA Ted Lanzaro, check out his website at www.lanzarocpa.com and www.taxcpact.com.
