On October 31, 2013, the Internal Revenue Service (IRS) released Notice 2013-71 (Notice), which modifies the “use or lose” rule for health flexible spending accounts (Health FSAs).
Flexible spending accounts (FSAs) are popular benefits offered by many employers as part of their employee’s health-care package. Health FSAs are accounts that allow employers to reimburse employees for qualifying out-of-pocket medical expenses, such as deductibles and co-pays, on a tax-free basis. The account must be set up according to a written plan that meets both statutory and IRS requirements.
One of these requirements is a “use-or-lose” rule, under which employees must forfeit any remaining Health FSA amounts that are not used up during the plan year. Additionally, beginning in 2013, FSAs became subject to a $2,500 annual limit under changes brought by the health care reform law.
Notice 2013-71 brought welcome news that the IRS is softening the use-or-lose Health FSA rules in response to the new $2,500 limit mandated by health care reform. Effective immediately, employers sponsoring FSAs have the option of amending their written plans to allow employees to carryover up to $500 of unused amounts remaining at the end of a plan year to the immediately following plan year.
Employers desiring to take advantage of the carryover relief must amend their written plans, but amendments in 2014 can be effective retroactively for 2013. Many Health FSAs already incorporate certain “grace periods”, and employers must choose between the new $500 carryover option or the grace period. In other words, plans cannot utilize both forms of relief.
This change will benefits employees, who can carry forward the unused benefit into a new year; and also benefit employers who will not see the annual rush of unnecessary spending to use all of the benefit as the year ends. It is a common sense reform that many companies will take advantage of as America adapts to the new health care landscape.