$500 Health FSA Carryover; Mid-Year Election Changes for Non-Calendar Year Cafeteria Plans

The Department of Treasury and IRS recently released guidance modifying the “use-or-lose” rule for health FSAs and clarifying previous guidance regarding non-calendar year cafeteria plan change in elections.

See IRS Notice 2013-71: http://www.irs.gov/pub/irs-drop/n-13-71.pdf.

Health FSA Carryovers of up to $500
Specifically, the IRS will allow for carryovers of up to $500 of unused amounts in health flexible spending accounts (health FSAs) in the immediately following plan year, but only if that health FSA does not also have a grace period.  This is a modification to the “use-or-lose” rule under current cafeteria plan regulations.

This is not a requirement but may be offered at the option of the employer.  If, however, it is offered, a plan amendment is required as is proper employee communication.

“[A]n employer, at its option, is permitted to amend its § 125 cafeteria plan document to provide for the carryover to the immediately following plan year of up to $500 of any amount remaining unused as of the end of the plan year in a health FSA. The carryover of up to $500 may be used to pay or reimburse medical expenses under the health FSA incurred during the entire plan year to which it is carried over… [T]he carryover of up to $500 does not count against or otherwise affect the indexed $2,500 salary reduction limit applicable to each plan year.”

“A plan adopting this carryover provision is not permitted to also provide a grace period with respect to health FSAs… If an employer amends its plan to adopt a carryover, the same carryover limit must apply to all plan participants.”  See IRS Notice 2013-71.

If you are interested in adding this option in to your plan, please contact us!

Non-Calendar Year Cafeteria Plan Mid-Year Election Changes
Additionally, the IRS clarified its previous safe-harbor for non-calendar year cafeteria plans allowing for mid-year election changes under the following circumstances:

1.  An employee who elected to salary reduce through the employer’s § 125 cafeteria plan for accident and health plan coverage with a non-calendar plan year beginning in 2013 is allowed to prospectively revoke or change his or her election with respect to the accident and health plan once during that plan year; and

2.  An employee who failed to make a salary reduction election through the employer’s § 125 cafeteria plan for accident and health plan coverage with a non- calendar plan year beginning in 2013 before the deadline in Prop. Treas. Reg. § 1.125–2 for making elections for the § 125 cafeteria plan year beginning in 2013 is allowed to make a prospective salary reduction election for accident and health coverage on or after the first day of the 2013 plan year of the § 125 cafeteria plan.

The IRS clarified that the above are allowed for employers regardless of size, and election changes can be made that are more restrictive than the above (but cannot be less restrictive).  Again, a written cafeteria plan amendment is required for these purposes.

For further guidance and updates from Fraser Trebilcock attorneys, contact us at 517-482-5800. Attorney Elizabeth Latchana can also be reached at elatchana@fraserlawfirm.com or 517-377-0826.