IRS Allows Some Carry-Over of Flex Spending Accounts

For years, employers have complained that too many workers reject a benefit designed to help them with child care or medical expenses because they don't want to risk forfeiting any money still in the account at year's end.

In response, the Internal Revenue Service has relaxed the "use-it-or-lose it" rule for flexible spending accounts (search) by letting employees carry over any unspent funds for an extra two-and-a-half-months. But a survey of 318 of the nation's largest employers shows that only about half plan to let employees take advantage of the additional time.

"I'm not surprised," said Martha Priddy Patterson, Most larger employers offer the plans because they increase employees' take-home pay without requiring the employer to increase gross wages. But only about 20 percent to 30 percent of eligible workers take advantage of the benefit, often because of the "use-it-or-lose-it" rule.

Employers are more likely to extend the deadline for spending money in the medical accounts than they are the child care accounts, Patterson said. That's because medical expenses are less predictable.

Only about a third of employers plan on letting workers take advantage of the extra two-and-a-half months for both types of accounts. Money left in the accounts once the deadline expires is forfeited to the employer.

Lawmakers on Capitol Hill have lobbied the Treasury Department to do away with the deadline entirely, arguing that it led to frivolous spending on health care at the end of the year as people rushed to spend any money still in their accounts.

The Treasury Department seems to have sought a middle ground by extending the deadline. In a letter sent last December to Sen. Charles Grassley (search), R-Iowa, Treasury Secretary John Snow explained that doing away with the use-it-or-lose-it rule entirely would result in fewer health savings accounts being established. Such accounts work much like the flex accounts, except unspent funds can be rolled over from one year to the next without penalty.

The Bush administration views the health savings accounts as effective in containing health care spending.

Patterson said even those workers who forfeit money in their flexible spending accounts should still consider using them.

"Even if you leave money on the table, the amount of taxes you save often makes up for it," she said.