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IRS Modifies the Health Flexible Spending Account "Use It or Lose It" Rule to Allow a Limited Carry Over of Unused FSA Funds

On Halloween, the IRS treated employers and health flexible spending account participants to a change in the longstanding "use it or lose it" rule. Beginning immediately, employers may amend their cafeteria plans to allow participants to carry over up to $500 of unused FSA funds at the end of the plan year so that the carryover can be used to reimburse qualified medical expenses incurred in the following plan year. In addition, the amount carried over will not count against the permitted $2,500 salary reduction limit applicable to the next plan year.

According to the guidance, however, a plan cannot use both a carryover provision and a grace period. Under a plan with a grace period, a participant has up to 2 ½ months after the end of the plan year to use amounts remaining from the previous plan year to pay expenses incurred during the 2 ½ month period. An employer would need to eliminate the grace period from their plan before adopting the carryover provision

An employer with a calendar year cafeteria plan may adopt the carryover feature for 2013 by adopting an appropriate amendment no later than December 31, 2013. More information may be found at IRS Notice 2013-71.

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