IRS Modifies FSA Rules to Allow Up to $500 to Be Used in Following Year (Parker Tax Publishing November 2013) To make health flexible spending arrangements (FSAs) more consumer-friendly and provide added flexibility, new guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year. Notice 2013-71. A Code Sec. 125 cafeteria plan generally does not include any plan that provides for deferred compensation. Proposed regulations under Code Sec. 125 that predate the enactment of the Affordable Care Act generally have prohibited participants from using contributions made for one plan year to purchase a benefit that will be provided in a subsequent plan year. Commonly referred to as the use-or-lose rule, this rule requires that unused benefits or contributions remaining as of the end of the plan year (that is, amounts credited to a health FSA participants account that remain unused) be forfeited. Notice 2013-71 modifies the rules for cafeteria plans and permits employers to allow employees to carry over up to $500 of the unused amounts left in their health FSAs for expenses in the next year. Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013. In addition, the existing option for plan sponsors to allow employees a grace period after the end of the plan year remains in place. However, a health FSA cannot have both a carryover and a grace period; it can have one or the other or neither. OBSERVATION: Many taxpayers requested that the use-or-lose rule for health FSAs be modified. Comments pointed to the difficulty for employees of predicting future needs for medical expenditures, the need to make FSAs accessible to employees of all income levels, and the desire to minimize incentives for unnecessary spending at the end of the year. For a discussion of FSAs, see Parker Tax ¶122,555. (Parker Tax Publishing Staff Writers) To Learn more about Parker Tax Pro Library, please visit our website parkertaxpublishing
Posted on: Fri, 08 Nov 2013 18:14:40 +0000
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