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Last minute FSA changes! How do they impact YOU?

2013 FSA Changes
IRS Changes Health FSA "Use-Or-Lose" Rule
2013 FSA Changes

On October 31st, the IRS modified cafeteria plan "use-it-or-lose-it" rules so that $500 may be carried over from one year to the next in FSA accounts. Under Notice 2013-71, these plans may now be modified so that up to $500 can be carried over to defray qualifying medical costs in the next year. The much hated rule change was a result of sharp criticism of the "use-it-or-lose-it" requirement, and concerns that participants were undergoing unnecessary medical procedures at the end of the year to avoid forfeiting account balances.

But the IRS gift comes at a price. Cafeteria plans that wish to take advantage of the new rule may not use a "grace period," which has been a popular feature in many FSAs, allowing participants to use prior year account balances to pay for expenses incurred in a following year during the first two and one-half months of that year.

Written Plan Amendment Required.

To take advantage of the new rule, plans must be amended in writing. A special transition rule allows an amendment to be made in 2014, effective as of the beginning of a plan year beginning in 2013. And, if a plan contains a grace-period provision and wants to allow the carryover, the grace-period must be amended out of the plan at the same time. The IRS warned that such retroactive amendments were allowable, but that other laws might be problematic.

Prior Run-Out Rules Still Effective.

The IRS was careful to point out that even though grace periods cannot be used in conjunction with the new rule, "run-out" periods are still allowed. A "run-out" provision allows a participant to use funds from a prior year during the first few months of the next year, but only to defray qualifying expenses incurred in the prior year. By contrast, "grace periods" allow funds from a prior year to be applied against expenses incurred in the first few months of the next year.

Contribution Limits Not Affected.

Health reform ushered in a new $2,500 limitation on healthcare flexible spending accounts effective in 2013. The IRS noted that this $2,500 limit is not affected by the new rules. In other words, a participant can carryover up to $500 and still elect the full $2,500 deferral in a following year.

For additional information see the US Treasury Department's Fact Sheet