Flexible Spending Accounts

Limited relief to the “use it or lose it” rule applicable to flexible spending accounts.
The Internal Revenue Service has extended the time for participants in flexible spending accounts to incur expenses to offset the amount deducted from their paychecks. Participants will have an additional 2 ½ months to incur medical expenses, dependent care expenses and other expenses that were elected for their flexible spending accounts for the preceding calendar year.

A participant in a flexible spending account elects at the beginning of the plan year, usually the calendar year, to have amounts deducted from his paycheck for benefits such as health care, dependent care and life insurance premiums. The amounts in the flexible spending account are subject to the “use it or lose it rule”. The participant must incur the expenses in same plan year. Any amounts remaining in the flexible spending accounts as the end of the plan year are forfeited.

Under the new rules, the participant has an additional 2 ½ months to incur expenses. The extended time to incur expenses is effective for the plan year beginning in 2005. For a calendar year plan, the extended time to incur expenses is March 15, 2006 if the plan sponsor amends the flexible spending plan by December 31, 2005.

If you have a flexible spending account, ask your employer to amend the plan before the end of the year. If you are an employer with a flexible spending plan, we recommend that you amend your plan before the end of the year. And, if you are an employer without a flexible spending plan, we recommend that you consider such a plan.

Please contact your RINA accountant if you have questions regarding the extended time to incur expenses for your flexible spending account.