In a victory for employers and employees, on October 31, 2013, the U.S. Department of the Treasury and the IRS issued Notice 2013-71, which modifies the "use-it-or-lose-it" rule for health FSAs to permit carryovers up to $500. In doing so, a considerable barrier to FSA participation (participant fear of forfeiture) has been lifted.
Under current law, plan participants are required to forfeit account balances remaining unused at the end of the plan year, although employers have the ability to provide a grace period of two and a half months following the end of the plan year for participants to use remaining account balances. Subject to certain requirements, Notice 2013-71 allows plan sponsors to permit participants to carry over up to $500 of the unused account balances for expenses in the immediately following plan year. The carryover will not count against or otherwise affect the indexed salary reduction limit (currently $2,500) applicable to each plan year. Health FSAs will not be permitted to have both a grace period and a carryover provision.
The modification adds flexibility to health FSAs and addresses the difficulty that employees face when predicting future medical expenditures and the incentives for unnecessary spending at the end of a plan year. The modification also addresses the reluctance lower-paid employees may have to participate in health FSAs due to the risk of even modest forfeitures.
Plan sponsors may adopt the carryover provision for the current plan year by amending the health FSA plan document in accordance with the requirements set forth in Notice 2013-71.
WHAT SHOULD EMPLOYERS DO?
- As many plan sponsors are now in their open enrollment period, they should consider adopting the carryover provision in their health FSAs.
QUESTIONS?
Please contact your MoFo attorney or any member of the Compensation, Benefits + ERISA Group.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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