Nov 01, 2013

Agencies Modify “Use-Or-Lose” Rule for Health FSAs

On October 31, 2013, the U.S. Department of the Treasury and the Internal Revenue Service (the “Agencies”) issued Notice 2013-71 (the “Notice”) which modifies the “use-or-lose” rule applicable to health flexible spending arrangements (“health FSAs”).  Under the “use-or-lose” rule, any funds left unused in a participant’s health FSA at the end of a plan year must be forfeited.

The Notice permits employers to amend their cafeteria plans to provide a “carryover” of up to $500 of unused amounts remaining in a participant’s health FSA into a subsequent plan year.  The carryover of up to $500 may be used to pay or reimburse medical expenses under a health FSA incurred during the entire plan year to which it is carried over.  Any remaining amounts at the end of a plan year can still be reduced during the plan’s “run-out period” (if any) before the carryover is applied. 

Although the maximum unused amount allowed to be carried over in any plan year is $500, the plan may specify a lower amount as the permissible maximum.  In addition, an employer has the option of not permitting any carryover at all.  However, if an employer amends its cafeteria plan to adopt a carryover feature, the same carryover limit must apply to all plan participants. 

To utilize the new carryover feature permitted under the Notice, a cafeteria plan amendment must be adopted on or before the last day of the plan year from which amounts may be carried over.  For instance, for a carryover feature to be effective for a plan year beginning on January 1, 2014 (i.e., to allow a carryover into 2015), the cafeteria plan must be amended on or before December 31, 2014.  There is a special rule with regard to carryovers for plan years beginning in 2013 – a 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.

This new carryover feature may not be adopted by a plan that has a “grace period” (i.e., the 2½ month time period immediately following the end of a plan year during which a participant may use amounts remaining from the previous plan year).

For more information on the Notice, please contact your SGR Executive Compensation and Employee Benefits Counsel.

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