In 2013 fewer Americans than ever put pretax dollars a way to cover future medical expenses but changes in 2014 will make these flexible spending accounts bit more attractive. These new changes will actually give taxpayers a bit of extra time to use their money.
Only 22% of eligible employees used the available flexible spending accounts that large companies were giving, meaning that they missed out on these tax-deferred plans that would have let them set aside up to $2500 to cover any out-of-pocket medical expenses that they might’ve had. While it’s only a slight dip from 2012 (23%) it still means that over 75% of eligible employees aren’t taking advantage of this excellent program. The reason isn’t that large employers have cut back because they haven’t, it’s just that people aren’t aware of the extra money that these plans would give them or are confused about how they can use this money.
In fact, the low number of people taking it vantage of these plants is due to the fear that they would lose their cash if for some reason they miscalculated their medical expenses. That’s why the fix that was just announced for next year should be helpful because it will more than likely make these people more comfortable with using the plan. The fix, announced by the Treasury Department in October, will allow taxpayers to carry over up to $500 of their plan’s balance into the next year. This puts an end to the “use it or lose it” restrictions that have been in effect for over 30 years, restrictions that meant a person would forfeit their remaining balance if they didn’t use it.
The reason for the change is that, since the Affordable Care Act capped FSA contributions at $2500 (down from $5000), the strict use it or lose it rules became less necessary. It’s expected that low to middle income families will find the plan more appealing in 2014 because it will give them more time to use their money. It will more than likely also reduce the unnecessary need for year-end spending that most taxpayers perform because they worried about losing their cash.
It was a valid fear, to be sure. The fact is that nearly one in four FSA participants was actually forfeiting their money come year end, even though some companies were actually giving their employees a 2 ½ month grace period. According to the new treasury rules these companies will, in the future, be allowed to either give the grace period or the carryover but not both. It’s been reported that some companies are actually letting workers take advantage of the carry-over option this year as well.
Of course what that means is that all employees should definitely check with their employer to find out if they will be able to carry over any unused funds into next year starting this year. Since many companies already require their employees to decide this year how much they want to contribute next year it’s believed that many more people will opt to contribute at least up to $500 because they know that they will have a few years to use the funds on medical expenses like copayments, prescriptions and deductibles.
Employees who contribute the maximum of $2500 and are in the 25% tax bracket could actually save themselves over $600 on taxes while people who contribute $500 could save $125. In either case, the new rules will make it much easier for people to take advantage of this program without fear that they’ll lose any money.