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By Sean Forbes
Oct. 31 --The Internal Revenue Service is relaxing its use-it-or-lose-it rules for health flexible spending accounts to allow participants for the first time to carry over up to $500 of unused amounts into the following plan year.
The notice goes into effect immediately, so employers can still amend their plans for the 2013 plan year, a senior Treasury official said during a media call Oct. 31.
Participants still can only use their contributions to pay for qualified medical expenses.
Plan sponsors that use the grace period rule, under which reimbursements may be paid up to 2-1/2 months after the close of the plan year, cannot simultaneously use the new carryover rule, according to the IRS guidance, Notice 2013-71, released Oct. 31. A sponsor must amend its plan to use the carryover rule, the notice said.
The $500 carryover will not affect the annual employee maximum contribution amount to health FSAs of $2,500, according to the notice. However, the accounts cannot be used as tax shelters, so no more than $500 can be carried forward from one year to the next, the official said. In other words, the carryover amounts cannot accumulate, the official said.
Health FSA plan sponsors now have three options, the official said: Provide a grace period, a carryover or neither. In addition, employers can set the annual contribution and carryover caps lower than the IRS maximums, the official said.
Employers could even “amend out” their grace period and adopt the carryover provision by the end of the 2013 plan year, but the official said the Treasury and the IRS don't anticipate many employers doing this.
The carryover provisions will probably help lower- or moderate-income employees, because such individuals “are more reluctant than others to participate because of aversion to even modest forfeitures of their salary reduction amounts,” according to the notice.
The changes should help reduce the tendency of participants to spend down their contributions by the end of the plan year, typically on “potentially wasteful” items, the official said.
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Text of Notice 2013-71 is available at http://op.bna.com/dlrcases.nsf/r?Open=kerl-9czv8g.
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