News & Announcements

New Rules for Health Flexible Spending Accounts

November 5, 2013

On October 31, 2013, the IRS issued Notice 2013-71 which detailed the modifications to the rules for §125 cafeteria plans.

Employers are now provided the opportunity to amend their plans to allow for up to $500 of unused amounts remaining in a health FSA at the end of the plan year to be paid or reimbursed to the plan participant for qualified medical expenses in the following plan year. Any unused amount in excess of the $500 is forfeited. The employer may choose a carryover amount that is less than $500.

This new carryover option cannot be used if the plan provides for a grace period extending the period of time for incurring expenses for qualified benefits for up to two months and 15 days after the end of the plan year. However, a plan with this grace period rule in effect may be amended to replace the grace period with this new $500 carryover provision.

This carryover limit must apply to all plan participants and cannot be cashed out or converted to any other taxable or nontaxable benefit. The amount reimbursed in any particular plan year cannot exceed the maximum allowable salary reduction deferral (currently $2,500) plus the amount carried over from the immediate prior plan year.

In order to utilize this carry over option, the plan must be amended. The amendment must be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of that plan year.

The second provision of this Notice allows an employer, at its election, to amend the §125 cafeteria plan to allow employees to revoke or change a salary reduction election amount that was previously made, and/or to allow an employee who did not make such an election to change their mind and make a prospective salary reduction election for coverage for that year. These elective changes can only be made once during the plan year, whether or not the employee experiences a change in status event. These changes may be applied beginning on or after December 28, 2012.

See the attached link to the actual Notice.

 

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