IRS Extends “Use It or Lose It” Filing Period

 

If your workplace offers a Flexible Spending Account (FSA), the IRS provides a filing extension that will make your employees happy.

 

The IRS changed the rules provides a two-and-one-half month grace period to receive reimbursement from their Flex account.  IRS Notice 2005-42 allows participants who have money left over at the end of the plan year more time to file their medical expenses. The money must be used for expenses that are allowed under the terms of the Flexible Spending Account.  Previously, any left over funds were forfeited.

 

A Flexible Spending Account reimburses employees for expenses such as eyeglasses, dentistry and co-payments. Some plans also reimburse employees for over the counter medications if they so choose.

 

These plans are advantageous to employees and employers because they use pre-tax dollars to pay for out of pocket medical expenses.  An employee typically estimates what his non-covered expenditures will be. This amount is then divided by the number of pay periods in a year, and that amount is deducted from each paycheck. The true savings occur because the payroll deduction is not subject to income tax.

 

This reduces the employee’s taxes and saves employers their share of payroll taxes on that amount. Because the account is funded with pre-tax dollars, it must abide by IRS regulations.

 

The “use it or lose it” rule has caused some distress for participants who did not spend as much as they had budgeted. This new rule gives them more time to spend their money rather than lose it. The key for employees who have money left at the end of the plan year is to use it quickly. Any remaining funds are still subject to the “use it or lose it” rule after the grace period expires.

 

If employers want to take advantage of this new ruling, they must amend their plan prior to the end of the current plan year. If your Flexible Spending Account runs on a calendar year, it needs to be amended prior to Dec. 31. The maximum grace period permitted would be until March 15, 2006.

 

The IRS notice says: “The grace period must not extend beyond the 15th day of the third calendar month after the end of the immediately preceding plan year.”

 

Employers may continue to provide a “run-out” period after the end of the grace period, during which expenses for qualified benefits incurred during the plan year and the grace period may be reimbursed or paid. This new regulation does not change the rules pertaining to “run-out” periods.

 

The IRS regulation became effective when it was released. So employers can begin to change their FSA plans now, if they choose to.