IRS Modifies FSA Rules to Allow Up to $500 to Be Used in Following Year
(Parker Tax Publishing November 2013)

To make health flexible spending arrangements (FSAs) more consumer-friendly and provide added flexibility, new guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year. Notice 2013-71.

A Code Sec. 125 cafeteria plan generally does not include any plan that provides for deferred compensation. Proposed regulations under Code Sec. 125 that predate the enactment of the Affordable Care Act generally have prohibited participants from using contributions made for one plan year to purchase a benefit that will be provided in a subsequent plan year. Commonly referred to as the use-or-lose rule, this rule requires that unused benefits or contributions remaining as of the end of the plan year (that is, amounts credited to a health FSA participant's account that remain unused) be forfeited.

Notice 2013-71 modifies the rules for cafeteria plans and permits employers to allow employees to carry over up to $500 of the unused amounts left in their health FSAs for expenses in the next year. Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013. In addition, the existing option for plan sponsors to allow employees a grace period after the end of the plan year remains in place. However, a health FSA cannot have both a carryover and a grace period; it can have one or the other or neither.

OBSERVATION: Many taxpayers requested that the use-or-lose rule for health FSAs be modified. Comments pointed to the difficulty for employees of predicting future needs for medical expenditures, the need to make FSAs accessible to employees of all income levels, and the desire to minimize incentives for unnecessary spending at the end of the year.

For a discussion of FSAs, see Parker Tax ¶122,555. (Parker Tax Publishing Staff Writers)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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