IRS Modifies 'Use-or-Lose' Rule for Health FSAs

IRS Notice 2013-71 recently modified the longstanding "use-or-lose" rule for health flexible spending arrangements (FSAs) so that covered individuals may now be permitted to carry over up to $500 in unspent funds in their health FSA accounts into the next year.

Plan sponsors who wish to adopt the carryover approach must amend their cafeteria plans to provide for carryovers by the end of the plan year from which amounts may be carried over, or by the end of the 2014 plan year for plans that adopt this rule for 2013.

A plan cannot incorporate both the existing two-and-a-half month grace period rule and the carryover approach. Therefore, plan sponsors may allow their cafeteria plans to:

  • Provide a two-and-a-half month post-plan year grace period during which expenses can be both incurred and paid with prior year funds; OR
  • Permit up to $500 of carryover contributions to the following plan year; OR
  • Not permit either a grace period or a carryover

A plan that adopts the carryover approach may continue to maintain a "run-out" period after the plan year, which is a period after the end of the plan year during which expenses incurred during the plan year can be submitted for reimbursement.

Additionally, the carryover of up to $500 into the following year does not affect the maximum amount of salary reduction contributions that the participant is permitted to make under § 125(i) of the IRC ($2,500 adjusted for inflation after 2012) in that following year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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