Dec 11, 2013

What You Need to Know About FSA Carryover Rules

IRS Relaxes Use-or-Lose Rules Under Health FSAs

Many people have questions regarding the new “use or lose” rules restricting employees from carrying over unused amounts in a health flexible spending account (FSA) to a subsequent year. It's important to understand new IRS changes when it comes to FSA carryover rules.

On October 31, 2013, the IRS in Notice 2013-71 announced new rules that liberalize the existing use-or-lose rules for health flexible spending accounts (“health FSAs”). The new rules allow participants with unused balances in their health FSAs at the end of a plan year to carry forward to the next plan year a maximum of $500 and use the carryover amount to pay for claims incurred in the next plan year.

The $500 carryover alternative is a new exception to the use-or-lose rules. The new rule allows a maximum of $500 to be carried over to the subsequent plan year and used to pay for incurred claims in the subsequent plan year, expanding the use of a prior year’s remaining balance. The employer may choose a lower carryover amount. The carryover option cannot be combined and used with a grace period, however it can be combined with a run-out period.  Amounts carried over are in addition to the participants’ maximum allowed deferral or $2,500.

To utilize the new carryover option, a § 125 cafeteria plan offering a health FSA must be amended to set forth the carryover provision. The amendment must be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of that plan year. Accordingly for those employers with a calendar year ending on December 31, 2013, the plan must be amended no later than December 31. Additionally, if any such plan includes a grace period, the plan must be amended to eliminate the grace period.

AWANE provides all the guidance you need to face the many changes affecting your employee benefits. Please contact AWANE directly with any questions you may have, and to also to find out how to become a member.