The IRS on Oct. 31 announced that employers sponsoring health flexible spending arrangements can drop long-standing “use-it-or-lose-it” rules that require employees to forfeit FSA funds if they don’t claim reimbursements by the end of a plan year.
The new guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year.
Employees will be able to use carryover funds to reimburse qualified medical expenses incurred during the following year.
The carryover option is available for all 2014 health FSA plans. An IRS statement said some plan sponsors may be eligible to take advantage of the option in 2013 plans.
Advice: Discuss the carryover option with the company that administers your health FSA. Read the IRS modification notice.
For nearly 30 years, employees eligible for health FSAs have been subject to the use-it-or-lose-it rule. According to the IRS, most forfeitures are less than $500.
An estimated 14 million families participate in health FSAs. Health FSAs may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. They are commonly funded by employees through voluntary salary reduction contributions.
FSA contributions are subtracted from taxable income, and FSA reimbursements are not taxed.
Plan sponsors must choose
The new carryover rule does come with a catch.
Under current law, plan sponsors have the option of allowing employees a grace period permitting them to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to 2½ months following year-end.
Plan sponsors now have to choose: Either allow employees the $500 carryover or allow the grace period. They can’t do both.
Note: Employers are not required to allow either grace periods or the new carryover.