HR GlossaryFSA Rollover

FSA Rollover

A flexible spending account (FSA) rollover is also called an FSA carryover. It is one of two alternate options a business’ plan administrator has to offer plan participants who do not use all of the funds they set aside for the plan year. Just as with contribution limits, this carryover amount is subject to IRS limits and regulations and may change annually. 

What is an FSA rollover? 

An FSA rollover is the amount of unused FSA funds the Internal Revenue Service (IRS) allows plan participants to carry from one year to the next plan year. There are two key points to understand: 

  • There is an annual maximum that can be carried over from one year to the next. It is typically about 20% of the maximum allowable yearly contribution ($3,050 for 2023).
  • FSA plan rollovers are not a guaranteed feature of all FSA plans. Only plan documents that specify eligibility allow rollovers.

Plan documents are managed by the FSA plan administrator on behalf of the company offering the FSA benefit. 

Why is understanding FSA rollovers important to my business? 

FSAs are attractive benefit options for current and prospective employees. Allowing the administration of the rollover option in the official FSA plan document only adds to the benefit’s value. Since FSAs allow for pre-tax deductions, they are a benefit that the government regulates. With that in mind, it is important to understand the ins and outs of including an FSA — and therefore an FSA rollover option — as part of your benefits offerings. 

FSAs can only be elected during a benefits enrollment period. They cannot be changed during the year without the participant experiencing a qualified status change such as: 

  • Marriage
  • Divorce
  • Adding or losing dependents

Do all FSA plans work the same way? 

FSA rollovers are not a uniform decision across all FSA plans. As plans are developed and documented, FSA administrators have three options: 

  • Not allow exceptions to the regular “use it by the end of the plan year or lose it” parameters.
  • Define an exception that allows the rollover of any unused funds to the new plan year instead of only allowing the rollover amount based on the 2023 IRS cap of $610.
  • Define an exception allowing plan participants to request reimbursement for eligible expenses incurred during the associated plan year for an additional 2.5 months into the new plan year.

Not all portions of FSA plans are eligible for these options. For example: 

  • The rollover option is only available for Health Care FSAs.
  • The extension option is available for Health Care, Child Care, and Elder Care FSAs.

Exceptions to the standard IRS rules require documentation in the plan document before the plan’s inception. There are no laws requiring you, as a business owner, to offer FSAs to your staff. Still, because the funds are pre-tax dollars, businesses save 7.65% on tax and FICA contributions for every dollar deposited into the accounts. 

What is the history of FSA rollovers? 

FSA rollovers are a relatively new option plan administrators can offer. The IRS changed the regulations in 2014 when they began allowing the carryover function as a viable option. This regulatory change implemented an either-or option requiring plan administrators to choose how their plans would be run. FSA plans can offer either: 

  • Fund rollovers
  • An expense filing extension

Plan administrators also have the option of allowing neither, but that is not advantageous for the employer because it limits the employee’s ability to file claims incurred at the end of the year. The IRS also created the rollover option to allow the plan participant to contribute the maximum annual amount above the amount carried over from the previous year. 

Summary 

An FSA rollover is an amount the IRS defines as an eligible carryover from one plan year to the next. It is typically about 20% of the maximum annual contribution and is regulated because of its pre-tax deduction status. FSA rollovers are typically mandated to be used before any current year’s deductions are used. They require specificity in the associated plan document, transparent tracking and documentation, and a detailed plan administrator.