Finally – News We Can Use
The Treasury Department and Internal Revenue Service announced Oct. 31st that employers’ Section 125 plans that contain health flexible spending arrangements (FSAs) may now allow FSA participants to carry over up to $500 of unused health FSA balances at plan year end to the immediately following plan year. This relaxes the stifling “use it or lose it” rule for the first time. See Notice 2013-71 for a complete explanation, or Treasury’s fact sheet for a summary. And hats off to the author of the notice for its brevity and clarity!
Employers may implement the change immediately (i.e., for the 2013 plan year), provided the Section 125 plan is timely amended (by the end of the 2014 plan year) and the requirements of the notice are observed in the meantime — for example, the plan may not contain both the currently permitted grace period rule (i.e., FSA dollars may be used during a period of up to 2/1/2 months after the end of the plan year) and this new $500 carryover rule. The plan may contain one or the other of these rules (or neither). The carryover rule won’t affect the annual employee maximum contribution amount to an FSA of $2,500.
This carryover rule is terrific news for health FSA participants. In addition to helping alleviate individuals’ hesitancy to contribute to an FSA due to difficulty in predicting medical expenditures for the upcoming year, it minimizes the impetus for year-end FSA spending rushes prompted by the “use it or lose it” rule.