FSAs Could Get Bump as Treasury Loses ‘Use-or-Lose’ Rule (Nov. 20, 2013)

The No. 1 barrier to consumer adoption of flexible spending accounts (FSAs) has been removed. The U.S. Treasury and IRS on Halloween announced they were changing their stance on the so-called “use-or-lose” rule, enabling consumers for the first time to roll over up to $500 from their FSAs instead of forfeiting those funds back to their employers. Another option is for employers to offer a grace period of up to two and half months for employees to spend unused funds, however, they can’t offer a grace period and a rollover.

Most forfeitures are less than $500, according to the joint announcement. Plan sponsors may be eligible to take advantage of the rule change this year, although employers aren’t mandated to offer employees either benefit.

Chris Byrd, president and chief operating officer, Evolution1, tells Paybefore this could be the “single-biggest thing to happen in this corner of the health care market, ever.” Evolution1 is a Paybefore Award-winning provider of payment software solutions for administering FSAs and other account-based employee benefits plans. Byrd has been lobbying Congress and Treasury for a rule change for approximately 10 years because nearly 80 percent of eligible employees don’t currently enroll in FSAs and research shows that by far the biggest reason they don’t is fear of losing funds. He expects most employers will offer the benefit to their employees because they will see greater FICA tax savings from less defensive funding (hence higher contributions) from existing participants.

The rule change came during peak benefits enrollment time. Byrd says he’s heard that some Fortune 500 and Fortune 1000 companies are reopening FSA enrollment, so employees can take advantage of the new rule. “The message to consumers is that if you only put $500 in the account, you’re safe,” adds Byrd, who says 2013 is likely to see some impact from the change, although he expects 2014 will see an even bigger uptick for FSA enrollment and deposits.

That prediction corresponds to survey results from Alegeus Technologies, which offers a Paybefore Award-winning multipurse benefits card. Alegeus asked more than 200 FSA administrators to provide reactions to the rollover announcement. Although employers have the option of amending 2013 FSA plans to include the rollover, 47 percent of survey respondents predict that less than a quarter of employers will do so. Rollover adoption for 2014 FSA plans is anticipated to be more significant with 33 percent of survey respondents predicting that more than half of employers will adopt, and 22 percent predicting more than 75 percent will adopt.

“The majority of [respondents] predict 10 to 25 percent growth in both FSA enrollment and account contributions for the 2014 plan year,” says Bob Natt, executive chairman, Alegeus. “Anecdotal feedback from a select group of FSA administrators suggests these numbers will climb higher in subsequent plan years,” he adds. “Communication and education surrounding this change should be the No. 1 priority for administrators and employers alike,” Natt tells Paybefore. “This change ultimately equates to increased card issuance and account balances as more consumers adopt FSAs in future plan years.”