Legal Alerts

If You Like Your Health FSA Balance, You Can Keep Your Health FSA Balance (up to $500): "Use-or-Lose" Rule is Modified to Permit Carryover


The U.S. Department of Treasury and the IRS modified the longstanding "use-or-lose" rule for health flexible spending arrangements (health FSAs) to permit employers to allow plan participants to carryover up to $500 of their unused health FSA balances remaining at the end of a plan year. Health FSAs are offered by employers through Section 125 cafeteria plans and allow participants to be reimbursed on a tax-favored basis for certain medical expenses that are not covered by their medical plans (e.g., copays, deductible, dental and vision care). Generally, employees decide before the beginning of a plan year how much money they want to contribute to their health FSA and any funds left unused at the end of the plan year generally must be forfeited.

Carryover May Apply to 2013 Balances

The health FSA carryover is optional. Plans may be retroactively amended to adopt the health FSA carryover for the plan year that begins in 2013 at any time on or before the last day of the 2014 plan year. The health FSA carryover limit may be up to $500, is not counted toward the employee's $2,500 annual health FSA salary reduction limit, and the carryover is determined at the end of an employee's run-out period. (A run-out period is generally the 60 or 90 day period after the end of the plan year during which medical expenses incurred in the preceding plan year may be submitted for reimbursement.) It is not necessary to track the usage of the $500 carryover, which can carryover as long as the employee is a participant in the Plan.

A Choice Between the Health FSA Grace Period or $500 Carryover

To soften the "use or lose" rule, the IRS had previously allowed a health FSA to have a 2 ½ month grace period immediately following the end of each plan year during which participants may use their unused health FSA balances to pay for medical expenses incurred during the grace period, with a run-out period after the end of the grace period. Plans that adopt the health FSA carryover cannot also maintain a grace period, but can continue to provide a run-out period after the end of the plan year. Therefore, if you currently have a grace period, you will need to amend the plan document to set forth the carryover provision prior to the end of the plan year for which amounts may be carried over and to remove any applicable grace period for that year. This may affect participants whose year end balance is greater than $500 and who would lose a portion if the grace period is eliminated for the 2013 plan year.

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