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Healthcare Flexible Savings Accounts (FSA): “Use It Or Lose It” Rule Modified

January 25 - Posted at 3:01 PM Tagged: , , , ,

On October 31, 2013, the US Treasury and the IRS issued Notice 2013-71, which modifies the “use it or lose it” rule for Healthcare Flexible Spending Accounts (FSAs).

 

A Healthcare FSA is a form of cafeteria plan benefit offered by employers to allow their employees to pay for eligible out of pocket healthcare expenses with pre-tax dollars. Healthcare FSAs are typically funded by salary reduction contributions.  Effective for plan years beginning after December 31, 2012, and employee’s contributions to a Healthcare FSA are limited to $2500 per year (indexed for inflation beginning in 2014).

 

Historically, these contributions were also subject to a “use it or lose it” rule which provided that contribution to plan that are not used before the end of the plan’s fiscal year would be forfeited. This rule was modified several years ago to permit a plan to add a “grace period” of 2 ½ months following the end of the plan’s fiscal year to allow employees an extra amount of time to use their FSA funds before losing them.

 

The new rules issued by the IRS permit another option that employers may want to consider. An employer may amend its plan document to permit a carryover of up to $500 for any unused FSA funds at the end of the plan year.  The carryover, if permitted in the plan, may be used to pay medical expenses incurred during the plan year to which it is carried over, and would be in addition to the $2500 employee contribution limit.

 

A plan adopting the new carryover option is not permitted to also provide a grace period. An employer must decide to either provide a grace period or the new carryover option, but not both. Of course, an employer may choose to provide for a carryover limit of less than $500, or not to permit the carryover or grace period at all, as these are both entirely optional. When deciding whether or not to eliminate a grace period in favor of the new carryover option, an employer may want to compare the potential administrative impact of each option.

 

As mentioned above, the new carryover rule is not available during a plan year in which the plan permits a grace period. Therefore, plans containing a grace period must first be amended to remove it if the employer wants to add a carryover provision. The amendment to remove the grace period must be adopted before the end of the plan year in which it becomes effective. For example, if an employers wants to permit employees to carryover up to $500 from the 2014 plan year to the 2015 plan year, the employer must amend the plan and provide participants with notice of the amendment before the end of the 2014 plan year.

 

Please contact our office for more information on how to implement an FSA into your workplace or amend your existing plan document.

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