Use-or-Lose Rule Modified for Flexible Spending Arrangements
November 11, 2013
The U.S. Department of the Treasury and the IRS have issued a notice modifying the longstanding "use-or-lose" rule for flexible spending arrangements (FSAs). Plans may now be amended to allow up to $500 of unused FSA account balances to be carried over to the next year in order to pay for qualified expenses incurred in that subsequent plan year. This option will allow employees to roll over unused funds at the end of the current 2013 plan year. The carryover option will apply at the discretion of the employer and is permitted only if the plan does not include the previously established grace period rule (allowing unused account balances to cover expenses incurred during the two and one-half months following the end of the plan year).
The new rule allows the carryover amount (up to $500) to be used to pay or reimburse qualified medical expenses incurred during the entire plan year to which it is carried over. If an employer adopts a carryover, the same carryover limit must apply to all plan participants. In addition, carryover amounts may not be cashed-out or converted to any other benefit.
Employers should determine whether or not they want to implement the carryover rule going forward. In order to implement a carryover option, the underlying plan document must be properly amended. In addition, participants must be notified of the change.
If you have questions about this change, please contact Phil Richards, Director of Client Services, at firstname.lastname@example.org or 423-764-4127.