Treasury Permits Carryover of FSA Amounts

In IRS Notice 2013-71, regulators have modified the FSA use-it-or-lose-it rule to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule. Under current law, 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.

Some plan sponsors may be eligible to take advantage of the option to adopt a carryover provision as early as plan year 2013.

“Across the administration, we are always looking for ways to provide added flexibility and common sense solutions to how people pay for their health care,” said Treasury Secretary Jacob J. Lew. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”

In Revenue Procedure 2013-35, the IRS announced the annual dollar limit on employee contributions to employer-sponsored health care FSAs remains unchanged at $2,500.

In addition, the small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.