Advocacy Recommends that the IRS Eliminate the Use-It-or-Lose-It Rule for Health FSAs

7-27-12 Tax Form

On July 24, the Office of Advocacy recommended that IRS eliminate the “use-it-or-lose-it rule” for health flexible spending accounts (FSAs). Advocacy’s letter pointed out that the rule negatively affects small business employers offering health FSAs, and recent changes to tax law make it no longer necessary.

The rules currently require funds remaining in a health FSA at year end to be forfeited. Advocacy’s letter suggested that the IRS allow employers to give plan participants the choice of receiving the unused taxable cash or making a tax-deferred contribution to a 401(k) or other pension plan.

Advocacy’s fact sheet on the issue provides additional information.

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