IRS Lets Employees Carryover Money in Flexible Spending Accounts – Here’s What Employers Need to Know

The IRS just made health flexible spending accounts more, well, flexible. From attorneys Allison De Tal, Isabel Safie, and John Wahlin of Best Best & Krieger:

“The Internal Revenue Service recently released Notice 2013-71, which provides an alternative to the Grace Period Rule for health flexible spending arrangements (FSA). Under this alternative, cafeteria plans may now allow employees to carry over up to $500 of unused amounts remaining in a health FSA at the end of the plan year into the immediately following plan year.”

From attorneys writing on JD Supra, five takeaways for employers:

1.       Employers must choose between the new carryover and the existing “grace period” feature:

“Cafeteria plans that wish to take advantage of the [carryover] may not use a “grace period,” which has been a popular feature in many FSAs, allowing participants to use prior year account balances to pay for expenses incurred in a following year during the first two and one-half months of that year.” (Fisher & Phillips)

2.       Employees still lose account balances over $500 at year-end:

“The “use it or lose it” rule would not be completely eliminated, however, and any unused credit in excess of $500 (after expiration of any “run-off” period) would still be forfeited. An employer who wishes to do so may also limit the permitted carryover to an amount less than $500.” (Jeffrey Ashendorf at FordHarrison)

3.       Employees are free to contribute the $2500 maximum when carrying over funds:

“Health reform ushered in a new $2500 limitation on healthcare flexible spending accounts effective in 2013.  The IRS noted that this $2500 limit is not affected by the new rules.  In other words, a participant can carryover up to $500 and still elect a full $2500 deferral in a following year.” (Fisher & Phillips)

4.       Employers still have time to amend the plan for 2013:

“An employer that wants to implement the new carryover option must amend its cafeteria plan on or before the last day of the plan year from which amounts may be carried over and the amendment can be made effective retroactively to the first day of that plan year. For example, an employer can amend a calendar year plan on or before December 31, 2013 and have the carryover rule apply for 2013. The employer must notify participants of the new rule.” (Eric Gregory at Dickinson Wright)

5.       Employers must weigh pros and cons of changing FSA features:

“There are pros and cons for employers to consider in adopting the carryover feature and eliminating a grace-period feature. For example, participants with year-end balances greater than $500 may benefit from a grace period feature that contains no cap but has a shorter duration for incurring and submitting claims, while participants with year-end balances of $500 or less may benefit from having a longer duration to submit and incur claims. […] It may also be impractical for an employer to remove a grace period feature for the 2013 or 2014 plan year that has already been communicated to employees.” (Amy Gordon, Joanna Kerpen, and Susan Nash at McDermott Will & Emery)

The updates:

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