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Treasury Modifies FSA/Cafeteria Plan Use-It-Or-Lose-It Rule Issue: Health Insurance (FSAs)

Action Taken: Flexible Spending Account (FSA) owners can now roll over up to $500 from the current year’s contributions into the subsequent year, if their employers amend their cafeteria plans to allow for it. The change came on October 31, when the Department of the Treasury issued Notice 2013-71 modifying the long-despised “use-it-or-lose-it” rule.


Background: For decades the Treasury Department has, by regulation, required that FSA users lose any unused account balances at year-end. NAIFA and others in the health and employee benefits community have been lobbying for decades to have this use-it-or-lose-it rule overturned, either by legislation or by regulation. Notice 2013-71 is the culmination of that effort.


The New Rule: Plan sponsors may amend their section 125 cafeteria plans to permit “up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule.” Further, the regulation states, “This carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the participant is permitted to make…”.


The regulation states that the carryover option is an alternative to the current grace period rule. The grace period rule, established in Notice 2005-42, allows a cafeteria plan to use amounts remaining from the previous year to pay expenses for certain qualified benefits for a period of up to two months and 15 days immediately following the end of the plan year.


Notice 2013-71 makes clear that whether to provide the carryover option is going to be at the discretion of the plan sponsor (employer). Further, the plan sponsor may further limit the $500 amount that can be carried over under the rule. And, the Notice emphasizes that no FSA amounts may be “cashed out” or used for any other taxable or untaxable benefit, but instead maybe used only to “pay or reimburse certain section 213(d) medical expenses (excluding health insurance, long-term care services or insurance).”


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January 8, 2016


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