Second Opinions

SECOND OPINIONS: Carryovers of Unused Health FSA Balances

December 4, 2013 ( - On October 31, the IRS and Treasury issued Notice 2013-71 which permits employers to allow employees to carry over up to $500 of unused health flexible spending account (FSA) balances to the next plan year.

By PS | December 04, 2013
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The Notice modifies the longstanding “use it or lose it” rule that has been intended to help enforce the requirement under Code section 125 that a cafeteria plan not provide for the deferral of compensation.  The Notice follows on the heels of a provision in the Affordable Care Act that limits the amount of salary reduction elections to a health FSA to $2,500 per taxable year effective for cafeteria plan years beginning after December 31, 2012.

Below are responses to questions we have received from employers regarding the Notice and the new carryover option.

What are the general carryover rules in the Notice? 

The Notice permits employers to allow an employee to carry over to the next plan year up to $500 of any unused amounts remaining in the employee’s health FSA at the end of the plan’s “run-out period” for the plan year.  Importantly, the carryover does not reduce the permitted $2,500 salary reduction election limit in the next plan year, and thus an employee with a carryover may still choose salary reduction elections for the next plan year of up to $2,500 (or another lower limit provided for in the plan).  If the employer decides to allow a carryover, the same carryover limit must apply to all participants.  

When do the new carryover rules become effective? 

The Notice permits employers to adopt the carryover provision as early as the current 2013 plan year.