This Halloween, the IRS and Department of the Treasury (Agencies) have made the healthcare flexible spending arrangement “use it or lose it” rule a bit less scary after the Patient Protection and Affordable Care Act’s $2,500 cap on FSA contributions was implemented this year. The Agencies have modified the “use it or lose it” rule to allow a limited carry over of $500 of unused FSA funds at the end of a plan year. This new guidance makes the use of health FSAs much more attractive to many individuals who have long been concerned about losing all of the money contributed to a health FSA if it was not used by the end of the plan year.
This action by the Agencies is in direct response to a soliciation for public comments regarding changes to the “use it or lose it” rule in IRS Notice 2012-40 and some legislative activity to consider possible changes to the rule that would make contributions to a health FSA more palatable after implementation of the $2,500 cap. In a rather surprising move, the Agencies also provided that the $500 carryover will not impact the ability of an individual to contribute the full salary reduction amount of $2,500 for the next plan year. However, there is one caveat. While the Agencies have not changed the ability of an employer to utilize the allowed grace period for use of health FSA funds, this new guidance does clarifiy that an employer may use the grace period or the carryover, but not both. Employers that currently utilize the permitted grace period should consider whether to continue using the grace period or to utilize the new carryover feature, and to amend their Section 125 cafeteria plan documents accordingly. Employers may also specify an amount lower than $500 that employees may carryover if this new provision is utilized.
Employers may be able to take advantage of this new carryover feature during 2013 for the 2014 plan year. For more information about the carryover, see the Treasury Press Release and IRS Notice 2013-71. The associated fact sheet may be accessed through the press release.
