Beginning in 2013 Obamacare limits the amount of tax free contributions a worker may place in the popular FSA or Flexible Spending Account to $2,500. By limiting the contributions, which reduce taxable income for individuals, additional revenue was raised to fund the health care law. In the process of course, the value of the FSA was reduced and out of pocket medical costs were raised for many Americans.
Many people use these accounts to help pay for medical and dental care above amounts reimbursed by their benefit plans. The high cost of orthodontics and glasses are ideal uses for the FSA.
The main drawback of the FSA is that money placed in the account but not used for medical expenses is forfeited.
In May the IRS released guidance for employer plans on applying the new cap. The unexpected good news is that the Notice (2012-40) says the IRS and Treasury Department are re-examining the long-standing “use it or lose it” rule for health FSAs.
It’s not time to jump for joy however because modifying the use it or lose it provision costs money. This is because it is assumed that more tax-free money will be placed into FSAs. If the rule is modified, it is likely that the amount not forfeited will be limited, perhaps up to $500 which has been proposed in legislation. It would help many Americans if the unused FSA funds could be rolled over from year to year and thus accumulated for health care expenses in retirement.
Even with the new $2,500 limit the FSA is a valuable tool to reduce health care expenses. Unfortunately the account is under used by the people could benefit most. With a little planning the potential forfeiture is not a problem.
If you have an FSA available, you should seriously consider its use during your enrollment period for 2013.
QUINNSCOMMENTARY 
Isn’t it interesting that the “use or lose” provisions are NOT actually part of the Internal Revenue Code or ERISA? Yes, friends, we have had “use or lose” in Treasury Regulations for almost three decades … based on … nothing.
Actually, we really should not encourage them to expend political capital (or taxpayer dollars) on health FSA’s. What we should be pushing for is an adjustment to Health Savings Accounts under IRC 223 to allow their use regardless of enrollment in a High Deductible Health Plan (itself a misnomer as even a $1,200 deductible qualifies as “high” for an individual). HSA is superior to FSA because the focus is on accumulating monies for future medical (dental, vision, etc.) needs – including post-employment needs.
And, if there are FSA’s to focus on, what we need is:
(1) An increase in the dollar maximum for dependent day care – $5,000 since …. introduction by ERTA 1981 – unchanged for over 30 years!, and
(2) Intelligent regulations and code provisions that will extend existing code for employer-sponsored adoption assistance plans, while foster creation of an adoption FSA (as the adoption provisions and tax preference are scheduled to expire 12/31/12).
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