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IRS Announces $500 Carryover for Health FSAs

Eide Bailly
Employee Benefits
U.S. Bancorp Center
800 Nicollet Mall, Suite 1350
Minneapolis, MN 55402-7033

800.300.1672
Fax: 877.918.3622

The IRS announced Thursday that it was modifying the health flexible spending account (FSA) “use or lose” provision to allow a carryover of up to $500 to the next plan year.

This change—IRS Notice 2013-71—only affects the Health Care and Limited Purpose Flexible Spending Accounts; it does not apply to the Dependent Care Account. In addition, the carryover balance does not count toward the $2,500 cap on salary reduction contributions. For example, an employee could elect $2,500 in their Health Care FSA for 2014 and carry over $500 from 2013, bringing the total for 2014 to $3,000. While the statute indicated the $2,500 cap would be indexed for inflation, the IRS indicated in its recently released Revenue Procedure 2013-35 that it will not increase the $2,500 cap in 2014.

Amending Cafeteria Plans
Employers will be able to amend their cafeteria plans to add the ability for employees to carry over up to $500 beginning with the 2013 plan year, as long as the plan is amended and the provision communicated before the end of the plan year. For plan years starting in 2013, the IRS has indicated that employers have until the end of 2014 to amend their plans. The dollars are not carried over until after the run out period to complete processing of the prior year claims. There is no ability to retroactively amend a plan to allow carryovers for a plan year that has already closed, so plan years that started in 2012 and ended in 2013 can’t be amended to allow the carryover to the new plan year that began in 2013.

Grace Periods Pose Issues
If the cafeteria plan has a grace period, the plan document must be amended to eliminate the grace period to allow this carryover provision, but employers must act quickly. Plans subject to ERISA would have some potential issues with eliminating the grace period after the plan year has started. If the amendment eliminating the grace period occurs too late in the year, participants could claim that they relied on the fact that the grace period was available. By eliminating the grace period, the employer is denying them a benefit that they are entitled to under the plan. The risk increases the closer an employer is to the end of the plan year. For these reasons, we do not recommend that grace period plans amend their plans to allow the carryover for the 2013 plan year. Please contact us if you would like to consider eliminating the grace period and amending your plan for 2014.

Impact on Health Savings Accounts
For plans that offer Health Savings Accounts, the guidance does not address whether a participant would be able to opt out of receiving a carryover balance. However, employers who do offer these plans should be able to provide an opt-out or waiver of a carryover so that a participant who chooses to open a Health Savings Account in 2014 would still be eligible to do so. If a participant does happen to receive a carryover of any amount from the Health Care FSA, then that participant would be ineligible to make or receive HSA contributions for the entire year.

Please contact your Account Manager with any questions or if you would like to amend your plan to allow the carryover from 2013.