IRS Grants New Carryover Rights For FSAs

Kelley Drye Client Advisory

The Internal Revenue Service has revised the use-it-or-lose-it” rule for health flexible spending arrangements (FSAs), now allowing up to $500 to be carried over to the following plan year rather than be forfeited.

Plans adopting the new carryover provision, however, cannot also provide for a grace period allowing unused amounts to reimburse medical expenses incurred within the first 2 1/2 months of the following plan year as allowed under current IRS rules. Hence, employers whose FSA plans currently provide for the grace period will need to decide whether to continue to allow for the grace period, which imposes no limit on the amount that may be used within the grace period, or to instead provide for the new $500 carry-over right, which does not require employees to use up their carried-over amounts within 2 1/2 months after the end of the year. This change is not mandatory; plan sponsors are free to not allow for any carryover at all.

Plan sponsors may specify a lower carry-over amount, so long as the same carryover limit applies to all plan participants. The carryover amount would not affect the $2,500 maximum deferral and reimbursement amount applicable to the subsequent plan year. For plans adopting the new carry-over rule, unused amounts over the $500 limit would continue to be forfeited.

Amendments implementing carryover and eliminating grace period provisions must be adopted on or before the last day of the plan year from which amounts may be carried over (i.e. by December 31, 2013 for calendar year plans that will permit a carryover into 2014).

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