Guidance Permits Carryover of Up to $500 of Unused Health FSA Balances

Guidance Permits Carryover of Up to $500 of Unused Health FSA Balances

On October 31, IRS and Treasury issued new guidance (Notice 2013-71) that modifies the “use it or lose it” rule that applies to health flexible spending arrangements (“FSAs”). Under this guidance, employers can now allow employees to carry over up to $500 of unused FSA balances to the next plan year.  Employers are permitted to adopt the carryover provision as early as the 2013 plan year.   We believe these are very welcome changes and provide a greater appeal for FSA plans.   Employers should take note of the following items when determining the appropriate action.

·   Employers’ plan documents must be amended to reflect these changes.  Your FSA administrator may charge an additional fee for a mid-year plan change.

·   FSA plans currently with a grace period cannot also allow the carryover provision.

·   The ability for an employer to provide for a carryover and also permit employees switching to a health savings account (“HSA”) to contribute to the HSA is still uncertain.  More guidance is expected.  We are hopeful that employers who also have a Limited FSA (or HSA compliant) plan in place, the individual will be permitted to roll the full FSA to the limited plan.

We suggest that employers consider adopting the rollover provision at plan year end, particularly employers who do not have an HSA as part of their plan options. 

We will continue to monitor and keep you informed of developments.