Treasury modify health flexible spending arrangements 'use-or-lose' rules

The U.S. Department of the Treasury and the IRS have issued a notice modifying the “use-or-lose” rule for health flexible spending arrangements (FSAs). The updated guidance permits employers to allow plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year.

Under current law, employees eligible for health FSAs have been subject to the use-or-lose rule, meaning that any account balances remaining unused at the end of the year are forfeited. Plan sponsors have the option of allowing employees a grace period permitting them to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to two and a half months following year-end.

Changes
The new guidance permits employers to now allow employees to carry over up to $500 of the unused amounts left in their health FSAs for expenses in the next year. Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013.

In addition, the existing option for plan sponsors to allow employees a grace period after the end of the plan year remains in place. However, a health FSA cannot have both a carryover and a grace period: it can have one or the other or neither.

Source: www.treasury.gov