IRS Announces New FSA Carryover Option

Jody Lee, Compliance Manager, Johnson & Dugan

On October 31, 2013 the IRS released Notice 2013-71 announcing additional relief from the “use-it-or-lose-it” rules that apply to unused Healthcare Flexible Spending Account (FSA) funds.  Currently, an additional 2 ½ month Grace Period feature can be added to the FSA plan for participants to incur and submit claims for excess funds. The new rule adds an option for FSA plan participants to roll over up to $500 in unused healthcare spending account funds to the next plan year.

Employers must decide between this new carryover provision and the existing Grace Period option and amend the plan accordingly. A third option is not to offer either feature.

Key facts to be aware of regarding the new carryover feature:

  • This feature is optional.
  • $500 is the maximum amount allowed to carryover, but the plan can set a lower limit.
  • A plan can either include the new $500 carryover or the 2 ½ month Grace Period, but not both.
  • The Plan Document will need to be amended to implement the carryover feature. If the plan currently has the Grace Period, the amendment will need to remove that feature and add the carryover option.
  • The plan maximum (up to $2,500 per IRS limits) can still be elected in the upcoming plan year, along with the $500 carryover.
  • The carryover balance is determined after the standard claim submission grace period ends (90 days after the end of the plan year).
  • The carryover provision applies to the Health FSA only.

There is not an automatic answer as to whether the carryover option is better or the Grace Period option is better. Some things you will need to consider:

  • The carryover provision does have a dollar limit, but does not have a time limit for claim filing.
  • The Grace Period option limits the time frame to incur expenses, but does not have a dollar limit.
  • Review past plan forfeitures to determine how either option might benefit your plan participants.
  • Review your plan document and check with your FSA vendor to get a clear understanding of amendments needed and potential fees.
  • Communicate any changes to your employees.

Contact your Johnson & Dugan Account Executive to discuss all the options you will need to consider as you determine if the carryover feature is a fit for your plan.