Health FSA “Use-it or Lose-it” Rule Revised to Allow Limited Carryover
Health FSA “Use-It or Lose-It” Rule Revised to Allow Limited Carryover
|The government has issued Notice 2013-71, which revises the longstanding “Use-It-or-Lose-It” rule for health flexible spending accounts (FSAs). Previously, under the Use-It-or-Lose-It rule, employees would forfeit any unused dollars in their health FSAs at the end of the plan year and/or an applicable grace period. Plan sponsors now have the option to allow employees participating in a health FSA to carryover up to $500 of unused dollars remaining at the end of the plan year to the following year.
How Does This Affect You as an Employer?
Prior to this notice, health FSAs were subject to the Use-It-or-Lose-It rule. At the beginning of the plan year, an employee would elect a set amount of money to be deducted from pay on a pre-tax basis. This deduction would be deposited in an account for the purpose of paying for eligible medical expenses (up to a maximum of $2,500). At the end of the plan year, any unused dollars in the account would be forfeited.
The change set forth in the notice makes health FSAs more consumer-friendly and provides some flexibility for employees. For the first time, employees with health FSAs will be permitted to carryover up to $500 of their unused health FSA dollars into the following year, instead of forfeiting the money. Any carryover will not count against the annual limit on salary reductions into a health FSA (currently a maximum of $2,500). The notice also made it clear that an employer cannot offer a carryover provision and a grace period at the same time.
Plan sponsors may be eligible to take advantage of this option and adopt the carryover provision immediately.
What Should I Do Next?
All of the allowed changes to health FSAs are optional, not required. Plan sponsors now have the choice of either allowing employees a carryover of up to $500 to the following year, or allowing them a grace period of up to two-and-a-half months to incur and be reimbursed up to the maximum amount left in the health FSA. A health FSA cannot, however, have both a carryover and a grace period. Furthermore, employers are not required to allow either option. A run-out period to submit claims is still permitted with either the carryover or the grace period. Here is a summary of the options:
Regardless of which choice is made by the employer, any decision should be communicated to employees and the health FSA administrator. Health FSA plan documents and summary plan descriptions must be amended by the end of the plan year beginning in 2014 to remain in compliance.