President's Budget Proposes $500 FSA Rollover

Currently, Flexible Spending Accounts (FSA's) are governed by the "use-it-or-lose-it" rule whereby any amounts of money left in an individual's FSA account at the end of the plan year must be forfeited (subject to claims incurred prior to the end of the plan year and the grace-period run-out) to the employer. This often causes employee distress and is a deterrent to people who might otherwise sign up for an FSA account. However, relief may be forthcoming. The proposed budget for Fiscal year 2003 contains two proposals that would allow FSA rollovers.

The following are descriptions of the two FSA rollover proposals now before Congress:

• An employer's FSA could permit up to $500 in amounts available for an employee's medical expenses but not used during the plan year to be carried forward to the employee's account for the next plan year of the health FSA. This proposal would be effective for plan years beginning after December 31, 2003 if passed.

• An employer's FSA could permit up to $500 in amounts available but not used for medical expenses during the plan year to be distributed to the employee or contributed to a 401(k) plan, 403(b) plan, governmental 457(b) plan, or Medical Spending Account (MSA). Amounts distributed would be subject to income tax withholding and employment taxes. Amounts the participant chooses to contribute to a 401(k) or other plan or MSA would be subject to the normal rules (e.g. contribution limits, discrimination tests, withdrawal restrictions, employment taxes) applicable to elective contributions to the receiving plan or MSA. This proposal would be effective for plan years beginning after December 31, 2003 if passed.

This is very good news and, if either is passed, we should expect to see higher participation and higher employee satisfaction related to FSAs.

Please contact ProBusiness for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 Fax: (425) 417-4795
e-mail: bsa@probusiness.com

(ProBusiness does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter should not be construed as legal advice. Your legal counsel should be consulted on all specific fact situations.)

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