Offering employees an option to avoid losing money that they've set aside for health care expenses may sound like a good thing, but employers might need to think twice before making the move, according to benefit consultants.
The Internal Revenue Service recently ruled that employers who offer flexible spending plans for health care expenses can allow employees to roll over up to $500 in unspent funds from one year to the next. That decision eliminates the "use it or lose it" provision that benefit consultants say has curbed participation in flexible spending accounts, or FSAs.
Such accounts allow participating employees to set aside up to $2,500 each year for deductibles, copayments and other qualified health care expenses. The money is deducted regularly from paychecks on a pretax basis, just like contributions to 401(k) accounts. (There are also FSAs for dependent care expenses, but the Oct. 31 IRS ruling does not apply to them.)
The change comes eight years after the IRS approved a two-and-a-half-month grace period that gives participants in health care FSAs a way around the "use it or lose it" issue. In 2005, the agency said participants could spend flexible spending account money from the prior year through March 15 of the next year.
The latest ruling allows employers to offer either the rollover or the grace period option -- but not both. If a company adopts either, the change must be written into documents governing the plan and explained to employees.
"One of the biggest concerns employers have around this is whether employees understand that it's one or the other," said Tom Hricik, a principal in the Pittsburgh office of Buck Consultants.
Mr. Hricik said the IRS announcement came as many employers were already into the open enrollment season for benefit plans. That could make many of them think twice about taking advantage of the change this year, he said. Employers would have to make computer systems changes to process rollovers and educate employees who have been told to "use it or lose it."
But there are bigger complications than explaining the implications of the change to employees, according to Jay Savan, a partner in the Atlanta office of Mercer, a benefits consultant.
Mr. Savan said more employers are moving toward high-deductible health insurance plans that offer lower monthly premiums but require employees to pay more for the cost of their care. Employees covered by the high-deductible plans cannot have a health care FSA, but they are eligible for another tax-advantaged plan called a health savings account, or HSA.
"That was the red flag that shot up for me," he said. "I was more alarmed than appreciative of the change."
Employers who adopt the rollover provision by the end of this year would disqualify employees who carry unused FSA money into next year from contributing to an HSA.
Mr. Savan said that in order to make a health savings account contribution or receive one from an employer, a person must be covered by a high-deductible plan. Other requirements also apply and the existence of an FSA balance disqualifies someone from participating in an HSA, he added.
Moreover, in most circumstances, the spouse and dependents of an employee participating in an FSA are ineligible to have an HSA, Mr. Savan said.
HSAs are "much more flexible and durable" than FSAs, he said. They allow single employees to set aside up to $3,300 a year ($6,550 for families) and the money does not have to be used in the year contributed, he said.
Mr. Savan believes many employers won't jump at the chance to add the rollover feature to their flexible spending account plans this year.
"Most people are busy planning for Thanksgiving, Christmas and other things, and the last thing they want to do is sit down and understand the nuances between FSAs and HSAs," he said.
Len Boselovic: email@example.com or 412-263-1941.