On October 31, the U.S. Treasury Department modified its FSA “Use It or Lose It” provision to allow rollover of health FSA funds. This means that the risk of losing FSA healthcare contributions at the end of the year is reduced and the rush to spend is eliminated.
The notice permits employers to allow employees to carry over up to $500 of the unused amounts left in their health FSAs for expenses in the next year. The existing option, which enables plan sponsors to allow employees a grace period of up to two and a half months after year end to use remaining funds for qualified FSA expenses, remains intact.
According to the guidance:
• Effective in Plan Year 2014* – Employers that offer FSA programs will have the option of allowing participants to roll over up to $500 of unused funds at the end of the plan year.
• Effective Immediately – Employers that offer FSA programs that do not include a grace period will have the option of allowing workers to roll over up to $500 of unused funds at the end of the 2013 plan year.
• Grace Period or Limited Rollover – Not Both – A health FSA cannot have both a carryover and a grace period; it can have either one or the other – or neither.
The notice further states that an amendment to the Section 125 cafeteria plan document must be adopted by the last day of the plan year from which amounts may be carried over, provided that a plan informs participants of the carryover provision. However, plans that currently do not offer a grace period may be amended to adopt the carryover provision for a plan year that began in 2013, at any time on or before the last day of the plan year that begins in 2014.
For additional information or a copy of Notice 2013-71, go to http://www.irs.gov/pub/irs-drop/n-13-71.pdf
* This guidance pertains to calendar year plans; there is transitional guidance pertaining to fiscal year plans outlined in the notice.
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