Use It Or Lose It—Or Maybe You Don’t Have To

In November 2013 the IRS announced new rules for up to $500 of unused amounts in a health Flexible Spending Account (FSA) that is part of a cafeteria plan.

The old rule was that if you didn’t have medical expenses during a plan year that totally used up your FSA, you were permitted a “grace period” of two months and 15 days in which to use up the previously unused portion.

Starting in 2013, health FSAs were limited to $2,500 per year, so the IRS decided to allow employers to amend their plan to allow up to $500 to carry forward into the next plan year. The only catch is that in order to allow the carry-over, the plan must not also allow the grace period.

If a plan has provided for a grace period and is being amended to add a carryover provision, the plan must also be amended to eliminate the grace period provision by no later than the end of the plan year from which amounts may be carried over. The ability to eliminate a grace period provision previously adopted for the plan year in which the amendment is adopted may be subject to non-code legal constraints.

We would be happy to assist you or your employer with any changes to your cafeteria plan.

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