IRS announces $500 carryover for Health FSAs

The Treasury Department and the IRS announced Oct. 31 that a Section 125 "cafeteria plan" may now be amended to allow up to $500 of unused money in a health FSA be carried over to the following plan year. Previously, employees have been subject to a "use-or-lose" rule that required unused benefits to be forfeited to the employer at the end of a plan year.

Since 2005, the law has allowed employers to incorporate a grace period of two and a half months after the plan year-end to pay for qualified expenses. The new $500 carryover comes in response to public comments expressing the need for additional options to increase flexibility.

Salary Reduction Limitation Unchanged

The availability of a carryover amount does not affect the indexed $2,500 salary reduction limitation applicable to each plan year; rather, it allows a payment for or reimbursement of qualified medical expenses up to the salary reduction limitation of $2,500 plus the carryover amount of up to $500. To utilize the new carryover option, the plan offering the FSA must be amended on or before the last day of the plan year from which amounts may be carried over. While the grace period is still an available option for increasing the flexibility of employer plans, it may not be used in conjunction with the carryover option.  Employers can keep the strict 12-month "use-or-lose" rule, elect to allow a grace period or elect to allow the new carryover option.

Transition Relief

Notice 2013-71 also provides transition relief for non-calendar year cafeteria plans beginning in 2013 regardless of whether an employee experienced the change in status that is normally required. An employer may now elect to amend its non-calendar year Section 125 cafeteria plans to allow employees to prospectively elect, change or revoke their salary election once during the non-calendar plan year that begins in 2013. 

For more information and examples, see Notice 2013-71.  If you have any questions, please contact your local Eide Bailly professional.