Modification of “Use-or-Lose” Rule For Health Flexible Spending Arrangements (FSAs) and Clarification Regarding 2013-2014 Non-Calendar Year Salary Reduction Elections Under § 125 Cafeteria Plans

    Please see below guidance from the IRS on the recent FSA announcement regarding the “Use-or-Lose” Rule. The plan may have a grace period OR the $500 rollover. You, as the employer, can determine how much you would like to allow the employee to roll over (it must be written in the plan document).  For additional information, please refer to the IRS notice HERE 

    “This notice contains modifications to the rules for § 125 cafeteria plans. First, sections II through V of the notice modify the “use-or-lose” rule for health FSAs that is currently set forth in proposed regulations under § 125 of the Internal Revenue Code (the Code). This modification permits §125 cafeteria plans to be amended to allow up to $50 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. This carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the participant is permitted to make under §125(i) of the Code ($2,500 adjusted for inflation after 2012). This carryover option provides an alternative to the current grace period rule and administrative relief similar to that rule.”

    “Accordingly, an employer, at its option, is permitted to amend its § 125 cafeteria plan document to provide for the carryover to the immediately following plan year of up to $500 of any amount remaining unused as of the end of the plan year in a health FSA. The carryover of up to $500 may be used to pay or reimburse medical expenses under the health FSA incurred during the entire plan year to which it is carried over.”



    Should you have questions regarding your plan, please contact your FosterThomas HR Consultant.