On October 31, 2013 the IRS issued Notice 2013-71 modifying the “use-it-or-lose-it” rule for health flexible spending accounts (“FSAs”) under §125 cafeteria plans. These modified rules are welcome relief for employers and employees, and can apply as early as the 2013 plan year:
- Carry over of up to $500 permitted: An employer that sponsors an FSA can choose to allow employees to carry over – rather than forfeit – unused FSA amounts of up to $500 to use to reimburse qualified medical expenses incurred during the following year.
- Plan amendments are required: Written cafeteria plan documents must be amended to adopt a carryover provision. Plan amendments can be adopted up to the last day of the plan year from which amounts may be carried over. A cafeteria plan may be amended to adopt the carryover provision for a plan year that begins in 2013 at any time on or before the last day of the plan year that begins in 2014.
- FSAs may not have both a grace period and a carryover provision: An FSA adopting a carryover provision is not permitted to also provide a grace period. Plan sponsors now have the choice of either allowing employees a carryover of up to $500 or allowing them a grace period of up to 2-1/2 months in which to use amounts remaining from the prior year.
- FSAs using of a carryover provision may still use a run-out period: An FSA using a carryover provision may continue to provide for the payment of expenses incurred in one plan year during a permitted run-out period at the beginning of the following plan year. (By contrast, a grace period permits expenses incurred during the first 2-1/2 months of the new plan year to be reimbursed with amounts remaining from the previous plan year.)