Employment Law Blog

News, trends and analysis in employment law and HR

Dec 09, 2013

IRS relaxes FSA “use it or lose it” rule

Employee Benefits 

Christmas comes early at the IRS—the agency recently relaxed the “use-it-or-lose-it” rule applicable to medical flexible spending arrangements (FSAs) under employer-sponsored cafeteria plans.

IRS Notice 2013-71 allows employers to amend their cafeteria plan documents to provide that up to $500 in unspent FSA funds can be rolled over to reimburse qualified medical expenses incurred during that subsequent plan year. Some employers already offer a “grace period” under their FSA, where employees can continue to incur expenses during the first two and a half months of the new plan year and have those expenses reimbursed using the prior year’s dollars. In that case, an employer wishing to take advantage of the rollover feature must amend its plan to remove the grace period provision, because you cannot have both a grace period and a rollover feature. Note that the grace period is different from the plan’s “run-out period,” which is the period following the end of the plan year (including any grace period) during which employees may submit claims for expenses incurred in the prior year.

As an employer, if you wish to allow funds to rollover from 2013 to 2014, you must amend your plan no later than the last day of the plan year in 2014. If possible, however, we recommend doing so in 2013. If you choose to implement the rollover feature in a future year, the plan must be amended no later than the last day of the plan year from which the funds would be rolled over.

Notice 2013-71 also provides relief for non-calendar year cafeteria plans from the rules prohibiting mid-year election changes, so that employees who had previously elected to pay their health insurance premiums on a pre-tax basis (or failed to elect) can change or cancel their election. This change was made so that employees can take advantage of individual health coverage offered through state or federal exchanges, regardless of their previous election (or non-election) under their employer’s cafeteria plan. Contact your Vigilant staff representative with any questions or for more information regarding FSAs.

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