Posted on: Friday, May 20, 2005

More time granted for care-account spending

By Albert B. Crenshaw
Washington Post

WASHINGTON — Workers who overfund pretax healthcare spending accounts may have an extra 2ý months after year end to spend the money before being forced to forfeit unused funds, the Treasury Department announced.

The ruling is expected to ease the annual late-year frenzy of spending on eyeglasses and other less-than-pressing medical needs that has developed as a result of use-it-or-lose-it rule than governs these flexible spending accounts. Each year, thousands of Americans belatedly realize they haven't spent the money they have set aside, and rush to do so.

The new grace period also covers dependent-care accounts, though it is the healthcare accounts that workers have found most problematic since healthcare costs tend to vary more than childcare costs.

In the accounts, workers decide before the beginning of the year how much they'd like to set aside — pretax, meaning that the money goes into the account untaxed.

As workers incur expenses during the year, they submit receipts to their employer and are reimbursed, untaxed, from their accounts.

If they underestimate their expenses, they have to pay some of those costs with after-tax dollars, missing some potential tax savings.

But if they overestimate and don't spend the money, they lose it altogether. The money goes to their employers.

"The new rule will give workers with FSAs more time to pay for medical and dependent-care expenses and will ease the year-end spending rush prompted by the prior rule," Treasury Secretary John Snow said after Wednesday's announcement. It is up to employers to decide whether to take advantage of the new rule.