If you often find yourself or your staff struggling to clear out  healthcare flexible spending accounts (FSAs), the federal government has offered you a reprieve.

Last week, the U.S. Treasury Department and the Internal Revenue Service announced that the government will relax the longstanding use-or-lose rule that applies to these accounts, which employees use to set aside pretax funds for healthcare expenses. The change will let employers allow workers to roll over a portion of unspent funds into the next year. More details below:

The changes explained: In a statement, the agencies announced that effective for the 2014 plan year, employers can opt to allow workers to carry over as much as $500 in unused FSA funds from year to year—funds that previously would have gone back to the employer. “Individuals can now participate in a health FSA without the risk of losing all of their unused contributions,” states the agencies’ fact sheet [PDF]. “This also cuts back on wasteful year-end FSA healthcare spending by limiting the risk of forfeiture, and in turn, reducing the incentive to spend down as year-end approaches in order to avoid losing unused funds.” According to the Society for Human Resource Management (SHRM), the changes have parameters that employers must consider, including when such a rollover program could be implemented. Another big decision for employers: whether to exercise the rollover option rather than continue to give employees a grace period (in some cases up to two and a half months) to spend leftover FSA funds after the plan year ends. The new rules allow for a grace period or a rollover—but not both.

Associations back move: The change, announced on October 31, came after the IRS received plenty of feedback regarding the rule. A number of groups, including SHRM, the Small Business Council of America, and the Small Business Association of Michigan previously expressed concern over the use-it-or-lose-it policy. The rule is one of the biggest deterrents to workers using the accounts and often leads people to spend money on things they don’t need, the groups wrote in a joint letter last year [PDF]: “A ‘use it or lose it’ repeal would return consumerism to FSA plans, since participants would not spend indiscriminately at year-end in order not to forfeit their monies. Instead, they would spend wisely throughout the year, knowing that any unused money would be received in either taxable cash or as a retirement plan contribution, or alternatively be rolled over to the following year’s account.” The rule change is not the total repeal the letter requests but something of a middle ground.

The change doesn’t affect health savings accounts (HSAs), which have always allowed for such rollover.

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