Savings grace

Savings grace

Jennifer Pellet

Flexible spending accounts, or FSAs, just got a flexible-timing boost. These plans enable employees to make tax-free contributions that can be spent on health-care or day-care expenses. Until now, they came with a caveat–funds left unspent by the end of the company’s benefit year were forfeited outright. But the IRS just loosened this “use it or lose it” constraint, reports Bob D. Scharin, editor of Warren, Gorham & Lamont/RIA’s Practical Tax Strategies, a monthly journal for tax professionals.

“The IRS will allow employers to give plan participants a two-and-a-half-month grace period after the close of the benefit year to spend their contribution amounts,” explains Scharin. “For the 2006 benefit year, for example, employees will have until March 15 of 2007 to spend those funds.” Employers with existing FSA programs will need to amend them before December 31 to offer the grace period for 2005.

Those considering adding an FSA should weigh the issue of cash disbursal. Scharin points out that for health FSAs, “Whatever amount the employee elects to put in for the year must be available to the employee immediately, even though those contributions will be made over the course of a year.” The same is not true, however, for dependent-care FSAs. He also notes that while a $5,000 federal limit applies to dependent-care accounts, employers set medical account limits.

JENNIFER PELLET ( is a New York City freelance writer specializing in business and finance.

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