The IRS is relaxing the rule where individuals must use -it-or-lose-it on health flexible spending accounts to allow participants for the first time to carry over up to $500 of unused amounts into the following plan year.
According to IRS Notice 2013-71, a plan sponsor must amend its plan to use the carryover rule. The Notice also states that the carryover rules goes into effect immediately, so sponsors can still amend their plans for the 2013 plan year.
Participants can still only use their contributions to pay for qualified medical expenses.
Plan sponsors should note that if they use the current grace period rule, under which reimbursements may be paid up to two and a half months after the close of the plan year, then they cannot also offer the new carryover rule. Consequently, FSA plan sponsors now have three options: 1) provide a grace period: 2) provide a carryover; or 3) provide neither a grace period nor a carryover.
The new $500 carryover will not affect the annual employee maximum contribution amount to health FSAs of $2,500, according to the notice. Furthermore, no more than $500 can be carried forward from one year to the next.
- Feds loosen ‘use-it-or-lose-it’ rule on health accounts (usatoday.com)