Recent guidance from the IRS modifies the long-standing “use or lose it” rule under a health flexible spending arrangement (“Health FSA”) to permit such arrangements to offer participants the opportunity to carryover up to $500 in unused Health FSA benefits for a plan year to the following plan year for reimbursement of medical care expenses incurred in such subsequent year. This new Health FSA carryover option is intended to provide participants with greater flexibility in using their Health FSA balance remaining at the end of a plan year and thereby avoid possibly unnecessary year-end Health FSA spending to prevent unused amounts from being forfeited to their employer.
Health FSAs - “Use It or Lose It” Rule -
A “cafeteria plan” is an employer-provided benefit plan that allows employees to choose between receiving taxable cash compensation or one or more tax-free “qualified benefits.” Qualified benefits include the opportunity to receive reimbursement of medical care expenses incurred by an employee or the employee’s spouse or dependents on a tax- free basis through a Health FSA. Contributions to a Health FSA may be made by employees through pre-tax salary reduction contributions, employer non-elective contributions (often referred to as employer “flex credits”), or both.
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