Health Flexible Spending Accounts (FSAs) have a unique rule called uniform coverage. This means participants can use their entire elected amount on the first day of the plan year, even if they have not contributed towards the plan. Essentially, they get access to the full potential contribution.
However there are two sides to this coin:
- For participants: It’s a use it or lose it situation. If they don’t spend all their elected funds within the plan year, they forfeit them, usually to the employer.
- Note: Unused funds may be carried over to the next plan year (up to IRS limits) or used during a 2.5 month grace period in the following calendar year.
- For employers: They can mitigate the liability by setting up different rules with their FSA administrator. They can also choose to add the “use it or lose it” stipulation to other employee benefit accounts like Dependent Care FSAs and Health Reimbursement Arrangements (HRAs).
Important points to remember:
- Uniform coverage only applies to Health FSAs, not other accounts like Dependent Care FSAs, HRAs, or HSAs.
- Other accounts require funds to be present before they can be used.