by Jennifer A. Grady, Esq.
On October 31, 2013, the White House issued a press release announcing a change in the Health FSA (Flexible Spending Account) policy. By modifying the “use-it or lose-it” policy, the new provision allows for up to a $500 rollover of unused FSA funds into the following plan year. This means that participants will no longer need to scramble to use the balance of their funds, or make unnecessary purchases just to prevent wasting of those funds. Currently, any amounts remaining in the plan after the optional Run-Out or Grace Period are forfeited.
The Run-Out-Period rule allows plan sponsors to specify a run-out period after the end of a plan year when participants can be reimbursed for medical costs incurred during the plan year. Those costs must be submitted during the run-out period. Under the Grace-Period rule, the plan may allow an employee to use amounts remaining in the plan from the previous year to pay medical expenses incurred during the period up to two months and 15 days immediately following the end of the plan year.
FSAs are one of the most attractive benefits employers can offer because they provide great tax savings to both the employer and employees, and assist employees in managing their medical expenses cash flow. However, despite the benefits, only 20% of eligible employees enroll in the plan because they fear that they will lose any unused funds in their accounts. With the new Carry-Over provision, the burden of choosing the ‘right’ FSA election and the employee’s fear of forfeiting contributions is greatly reduced. Many employees will enroll for the first time and save 25% or more in taxes on their contribution dollars.
Employers interested in this new Carry-Over provision may adopt it immediately, but FSA plans may not include both the Grace Period provision and the Carry-Over provision. Employers interested in adopting the Carry-Over provision immediately should contact their third party administrator, as the deadline to amend the plan will depend on the current plan design. Otherwise, employers may opt to adopt this provision for the next plan year.
The Affordable Care Act amended Section 125 to limit the amount an employee may elect to contribute to a health FSA during a plan year. For the years 2013 and 2014, the limit is $2,500. The new carryover option does not affect this plan-year limitation. An employee may carry over to the subsequent year up to $500 and still elect to contribute up to $2,500 in that subsequent year.
For more information, view the IRS Notice 2013-71.
Disclaimer: this material is provided for informational purposes only, and should not be construed as legal, financial, tax, or accounting advice. It should not, and cannot, be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult a licensed attorney to discuss buy-out options, and a licensed insurance representative before making any insurance purchases.