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.
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?
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.