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Treasury Modifies FSA

Treasury Modifies "Use-or-Lose" Rule for Health Flexible Spending Arrangements by allowing plans an annual $500 carryover provision

Health FSAs are now permitted to allow participants to carryover up to $500 of unused amounts into the next plan year and still contribute up to the maximum $2,500 limit. While some plans currently exercise the option to allow a grace period for unused amounts left in a participant’s health FSAs, it along with the new carryover option are not required.

"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." *(Treasury Press Release, 10/31/2013)

If a plan wishes to allow the carryover option immediately or in future plan years, a plan amendment is required, according to the regulations. The amendment must be adopted on or before the last day of the plan year for which amounts may be carried over and may be effective retroactively to the first day of that plan year. If a plan has provided for a grace period, and is being amended to add a carryover, the amendment should also eliminate the grace period provision. Notice of the change must be provided to health FSA participants.

The carryover provision is only applicable to the health FSA and does not apply to the dependent care FSA.

There could be an impact on HSA eligibility. The Notice did not provide information regarding HSAs and the carryover.

Plan Sponsors should review their plans to determine if a grace period or limited rollover or neither is the best option for them.

*http://www.treasury.gov/press-center/press-releases/Pages/jl2202.aspx

This communication is designed to provide a summary of significant developments to our clients. Information presented is based on known provisions. Additional facts and information or future developments may affect the subjects addressed. It is intended to be informational and does not constitute legal advice regarding any specific situation. Plan sponsors should consult and rely on their attorneys for legal advice.