Flexible spending accounts (FSAs) allow taxpayers to set aside pre-tax dollars to pay for out-of-pocket medical expenses. The drawback has been the fact that unused amounts each year are forfeited, which makes careful calculation important. Plans could provide a 2.5 month grace period to use up unspent set-side dollars.
How a change announced by the IRS adds more flexibility to these accounts. Plans can be modified by employers to allow up to $500 of unused amounts to be carried over into the following year. Health FSAs cannot have both the old 2.5 month grace period and the $500 carryover; they can have one or the other (or neither). The plan document must be amended to accomodate whatever plan changes the employer wants to implement.