On October 31, 2013, the Internal Revenue Service (“IRS”) announced a modification to the “use-it-or-lose-it” rule that applies to health care Flexible Spending Arrangements (“FSAs”) under a cafeteria plan. Under the use it-or-lose-it rule, unused amounts in a participant’s health care FSA for a plan year not used to pay eligible medical expenses incurred during the plan year were required to be forfeited to the employer, unless the employer adopted the 2 1/2 month grace period. The grace period rules permit participants to use amounts remaining from the prior year to pay eligible medical expenses incurred during the first two months and 15 days immediately following the end of the plan year (March 15 for a calendar year plan).

The New Carryover Provision -

Under the new rule, an employer, at its option, may permit a participant to carryover to the immediately following plan year up to $500 in unused amounts from a health care FSA. This carryover may be used to pay or reimburse medical expenses under a health care FSA incurred during the entire plan year to which it is carried over. The rule also provides that...