A big change to the rules governing health flexible spending accounts (FSAs) was recently announced by the Internal Revenue Service (IRS).
On Oct. 31, the IRS released Notice 2013-71, which relaxes the “use-or-lose”rule for health FSAs. Previously, any money put into a health FSA could not be carried over into the next year, although reimbursements were allowed to be paid for qualified expenses incurred in a“grace period” of up to two and a half months after the end of the plan year.
Under the relaxed rule, employers will now be able to allow participants to carryover up to $500 in unused funds into the next year. Any unused FSA amount above $500 will be forfeited. This modification applies only if the plan does not also incorporate the grace period rule.
This new carryover does not affect the $2,500 limit on salary reduction contributions. This means the plan may permit the individual to elect up to $2,500 in salary reductions in addition to the $500 that may be carried over.
For ease of administration, a cafeteria plan is permitted to treat reimbursements of all claims for expenses that are incurred in the current plan year as reimbursed first from unused amounts for the current plan year and, only after exhausting these current plan year amounts, as then reimbursed from unused carryover amounts from the preceding plan year.
To implement the new $500 carryover option, a cafeteria plan offering a health FSA must be amended to include the carryover provision.
Please contact Pendleton Financial for more information on health FSAs.