IRS PERMITS $500 HEALTH FSA CARRYOVER
IRS Notice 2013-71 allows a health flexible spending arrangement ("health FSA") to permit up to $500 to be carried over to the next plan year. Up to $500 can be carried over even if, for the following year, the participant elects (1) the $2,500 statutory annual maximum; or (2) not to contribute to the health FSA. The plan must apply the carryover rule to all health FSA participants and cannot also include a grace period during which participants may use amounts from the previous year.
A health FSA can be amended to add carryover on or before the last day of the plan year from which the carryover is to be permitted. For example, a calendar year plan that is amended on or before December 31, 2014, can permit carryover of up to $500 available to pay expenses incurred in 2015. Under a special transition rule, the new carryover rule can apply to the 2013 plan year if the plan is amended by the last day of the 2014 plan year. Employees should be notified soon if their plan will be amended so they can plan year-end expenses appropriately. A plan that currently has a grace period must consider the effect of replacing the grace period with a carryover of a more limited amount.
Advantages of carryover:
- Reduction of forfeitures, benefiting employee morale
- Elimination of year-end expenses incurred solely to use up account balances
- Increased participation, resulting in additional FICA savings for the employer
Disadvantages of carryover:
- Additional administrative complexity
- Loss of health savings account eligibility
- Increased costs to the employer if employees recover more in reimbursements than they contribute by payroll deductions for a year
If you have any questions regarding the implications of IRS Notice 2013-71 or any concerns regarding revisions needed to your plans or policies, please contact a member of Oppenheimer’s Employee Benefits Group.