New Health FSA “Use-It-or-Lose-It” Rule Could Impact Open Enrollment– November 06, 2013

Health flexible spending arrangements (FSAs) — also commonly known as cafeteria or Section 125 plans — have historically required participants to forfeit all funds left in their account at the end of the plan year. In 2005, the IRS introduced a limited grace period rule that allows participants to spend unused amounts from a plan year during the first two-and-a-half months of the next plan year.

On October 31, 2013, the IRS issued Notice 2013-71, which gives employers a new option to allow participants in FSAs who do not use all of their contributions in a plan year to carryover up to $500 to the next plan year. Funds that are carried over will not affect the following year’s $2,500 annual FSA salary-reduction limit.

The new carryover rule is an alternative to the grace period rule, meaning employers who choose to implement the carryover provision must discontinue use of the grace period.

Employer Action & Timing

HR departments are advised to make decisions regarding potential changes to the FSA component of their cafeteria plans before open enrollment begins in the next couple of weeks so that employees will have time to incorporate the changes into their 2014 FSA elections.

In the case of a plan that contains grace period provisions, the plan must be amended to eliminate the grace period no later than the end of the plan year from which amounts may be carried over (e.g., December 31, 2013, for a calendar year plan wishing to carryover amounts from 2013 to 2014). The IRS notice points out that the ability to eliminate a grace period provision previously adopted for a plan year may be subject to non-code legal restraints. Thus, as a practical matter, a plan that currently contains grace period provisions may have to wait until its 2014 plan year to implement the carryover provisions.

Employers who want to implement the carryover provision generally must formally amend their plans by the last day of the plan year for which amounts will be carried over; however, for a plan year beginning in 2013, the deadline for amending is extended to the last day of the plan year that begins in 2014.

Special 2013 Election for Participants in Fiscal Year Cafeteria Plans

The IRS notice also contains a provision that would permit participants in fiscal year cafeteria plans a special, one-time election to make prospective changes to their cafeteria plan elections during the 2013 fiscal year. This special election is intended to accommodate the needs of participants who choose to enter the new healthcare exchanges effective January 1, 2014, (which falls during the 2013 fiscal year) and who otherwise would not be able to change their cafeteria plan elections until the end of the 2013 fiscal year.

Click here to read the IRS notice. To discuss incorporating the carryover provisions into your flexible spending account, please consult with the members of your Cohen & Company service team and your attorneys.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.