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New Changes to Flexible Spending Account rules
No CommentsThe Department of Treasury and IRS released Notice 2013-71 on October 31, 2013 modifying the “use-it-or-lose-it” rule for health flexible spending accounts (FSAs). The Notice permits cafeteria plans to be amended to allow for up to a $500 carryover of unused funds at the end of a plan year. Amounts carried over would then be available to pay claims incurred in the immediate following plan year.
The carryover will not affect the $2,500 maximum annual election permitted for a given health FSA plan year. However, the new option does come in exchange for any existing grace period that has been incorporated into the plan. Plans cannot contain both a carryover provision and grace period, not to be confused with the plan’s run-out period which gives participants a brief window during which to submit claims incurred in the prior plan year.
Employers choosing to adopt the new carryover option will need to be sure plan documents are amended accordingly and that no plan year allows for both a carryover and grace period to submit claims. In addition, rules surrounding the order in which claims will be paid from the carryover account and current year account will need to be established. Check with your current administrator prior to finalizing ordering rules to ensure that these can be accommodated!
The modification to the longstanding “use-it-or-lose it” rule was made in order to make plans “more consumer-friendly and provide added flexibility,” which will likely make health FSAs more attractive to employees in upcoming annual enrollment periods. However, employers should be sure to consider the new option carefully before making plan modifications, as the provision has sparked some questions regarding the impact such a carryover would have on HSA eligibility for the following plan year and allowing carryovers may result in a marked decrease in forfeitures at the end of a plan year which may create increased expenses to the employer if those funds were being used to cover costs such as plan administration expenses.
