On Thursday, October 31, 2013, the IRS issued Notice 2013-71 which amends the “Use-or-Lose Rule” for health flexible spending accounts. The Notice amends the cafeteria plan regulations to allow health FSA participants to carryover up to $500 in unused amounts remaining in their FSA account at the end of the calendar year. An employee is allowed to use these remaining funds (up to $500) for expenses incurred at any time in the following plan year. This carryover option would be an alternative to the 2 1/2 month grace period that many cafeteria plans currently include. The employer will be permitted to include only one of these options in its cafeteria plan.
The following are key facts that relate to this new rule:
1) Employees are still permitted to elect salary deferral of up to the maximum amount of $2,500 (for 2014 plan years and indexed thereafter), regardless of the amount that is carried over.
2) The final amount that can be carried over is determined at the end of any run-out period (the period after the end of the plan year during which claims from the prior year can be submitted).
3) The employer can limit the carryover amount (if it chooses to allow a carryover option) to an amount of $500 or less.
4) The final amount that is carried over is the lesser of (1) the unused amount in the employee’s health FSA and (2) the carryover limit established by the employer.
5) The carryover limit must apply to all plan participants.
6) The funds that are carried over cannot be provided to employees as cash.
7) Employers that adopt the carryover option are required to notify employees about the option.
In order to include the carryover option in its cafeteria plan, an employer is required to amend its plan documents prior to the last day of the plan year prior to any carryover. For example, employers can allow employees to carryover funds contributed in 2014 to a calendar year plan by amending their plan documents prior to December 31, 2014. For 2013 plan years, employers have until the end of the 2014 plan year to adopt the amendment.
In addition, the employer is required to remove any existing grace period provision from the plan, but can do this only for plan years that have not yet begun. This means that any plan that currently includes a grace period provision cannot be amended to remove the grace period following the 2013 plan year, but can remove it (and add a carryover provision) for the 2014 and following plan years.
“Bottom Line: Employers with health flexible spending accounts should consider whether to amend the plan document to modify the “Use-or-Lose Rule” to allow a carryover up to $500.
We hope you find this issue of KKAL’s Labor and Employment Law Watch helpful and informative. Please understand that the Law Watch is designed to provide information about current developments and required actions. If you have any questions regarding any labor and employment law matter, including the issues discussed in this newsletter, please do not hesitate to contact us at 717-392-1100, or email us at the following addresses:
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KEGEL KELIN ALMY & LORD LLP
Labor & Employment Practice Group
(717) 392-1100
Denise E. Elliott, Chair elliott@kkallaw.com
Amy G. Macinanti macinanti@kkallaw.com
Jeffrey D. Litts litts@kkallaw.com
Paul D. Clouser clouser@kkallaw.com
Howard L. Kelin kelin@kkallaw.com
Judith A. Griffith griffith@kkallaw.com
Stephen S. Russell russell@kkallaw.com
© 2013 Kegel Kelin Almy & Lord LLP. All Right Reserved.
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