IRS Modifies "Use-it or Lose-it" Rule for Flexible Spending Arrangements (FSAs)

The Internal Revenue Service (IRS) released a notice on October 31 which modifies the “use-it or lose-it” rule for health flexible spending accounts (health FSAs) to allow a $500 annual carryover of unused contributions. This carryover provision serves as an alternative to the existing “grace period” rule.

Effective immediately, employers may amend their health FSAs to allow an annual carryover of up to $500. Employers wishing to adopt the carryover provision for the 2013 plan year must amend their cafeteria plans by the end of the 2014 plan year.

Employers may also amend their Section 125 plan to allow off-cycle changes in health plan enrollment elections for plans that do not follow a calendar year.

If you have any questions about the modifications to the “use-it or lose-it” rule for FSAs, or the transition relief for 2013-2014 plans, please contact your Senn Dunn Employee Benefits Account Manager.