Ironically, one of the first things that employees probably heard about the health care reform law back in 2010 had a decidedly anti-reform sound to it: It would halve the legal limits on health flexible spending account (FSA) contributions to $2,500 in 2013.
By contrast, one of the last things that employees are likely to hear about the health care reform law before the wave of 2014 changes take effect is some good, pro-participant news about health FSAs: Plans can allow carryovers up to $500 in unused contributions to the next plan year, starting as soon as 2013.
That change comes courtesy of Internal Revenue Service (IRS) Notice 2013-71, which modifies the little-loved “use-it-or-lose-it” rule that applies to health FSAs under section 125 of the Internal Revenue Code. Carryovers are optional for plans and would represent the largest general liberalization of the use-it-or-lose-it rule since grace periods were first allowed in 2005.
This relief does come at a cost though. Health FSA plans that use grace periods cannot also permit carryovers. To take advantage of the optional carryover feature, a health FSA plan’s existing grace period would have to be eliminated by the end of the year from which amounts could first be carried over. Beyond this technical requirement, there could be practical limits on how quickly a plan sponsor could eliminate a grace period to permit carryovers.
Importantly, these carryovers will not change certain fundamental health FSA rules. For instance, a participant will not be able to contribute more than $2,500 to a health FSA in a plan year, or to receive reimbursements greater than $2,500 plus the new carryover amount in a plan year. Plans can continue to collect and use forfeitures—even if a plan allowed a maximum $500 carryover, it would provide for the forfeiture of any amount of unused contributions beyond $500 at the end of any runout period.
Under Notice 2013-71, any amounts carried over to the next plan year could be used for qualified medical expenses anytime during that plan year. Also, a plan would be permitted to simplify its administration by treating all claims for expenses that are incurred in the current year as reimbursed from unused amounts credited for the current plan year. Once these current year amounts are exhausted, a plan could treat claims for expenses as reimbursed from unused amounts carried over from the preceding year.
To utilize the new carryovers, a health FSA plan generally would have to be amended to permit the carryovers before the last day of the plan year from which amounts could be carried over. The amendment to allow carryovers may be effective retroactive to the start of the plan year, provided that the plan is operated in accordance with Notice 2013-71 and participants are notified. For a plan year that begins in 2013, however, a plan may be amended at any time before the end of the plan year that begins in 2014.
Separately, Notice 2013-71 also clarifies one point about the 2013 proposed regulations that permitted non-calendar year cafeteria plans to let participants change their elections in response to the availability of coverage under the federal health insurance exchanges. That cafeteria plan rule change would apply to non-calendar year cafeteria plans, regardless of the size of the employer that sponsored the plan. The proposed regulation itself was limited to employers that had more than 50 full-time equivalent employees in the preceding year.