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Changes to Health FSAs - Will you Amend?

On October 31, 2013, the Internal Revenue Service released Notice 2013-71, which allows Flexible Spending Account (FSA) plan participants to carryover up to $500 to the next year plan if the FSA plan does not offer the 2 1/2 month grace period. In this quick reference guide you will find the key highlights of the new provision.

  • Carryover applies to both general purpose and limited purpose health FSAs
  • Amounts carried over from a general purpose health FSA appear to disrupt a participant's HSA eligibility in the year in which the balance is carried over

PLAN REQUIREMENTS

  • Plan cannot provide a grace period in addition to carryover (one or the other but not both)
  • Plan can provide for a run-out period in addition to the carryover (extends the deadline to submit claims, usually 90 days)
  • Plan can limit the carryover to an amount less than $5oo but $5oo is the maximum
    • Amounts over $500 will be forfeited
  • $500 carryover will not impact the $2,500 maximum election for the following year

PLAN AMENDMENTS

  • 2013 Plan Year
    • Can add the carryover provision to 2013 plan years; plan must be amended to remove the grace period prior to last day of plan year (12/31/2013 for 2013 calendar plan year). Special transition relief for 2013 provides that if plan does not have a grace period, the amendment for a 2013 plan year may be made by the end of the 2014 plan year.
  • 2014 Plan Years
    • Amendment to add the carryover provision for 2014 must be done prior to 12/31/2014.
  • Same timing logic for changes in future years.
    • Amendments for that plan year must be done by the last day of the plan year, i.e.; 2015 calendar year plans will have a deadline of 12/31/15

PLAN AMENDMENT CONSIDERATIONS

  • Review actual plan balances.  If all balances are less than $500 then adopting the carryover provision could be beneficial. Participants with large balances may already have a plan to use the balance up during the grace period (paid after the plan year).
  • Administrative Impact Carryover has on Run-out Period:
    • Claims incurred in the prior plan year and submitted during the run-out period will reduce carryover amount if carryover amount is under $500
    • Claims paid will need to be monitored carefully to determine the impact on the $500 carryover.

For a printable version of this quick reference guide, click here. 

To access the complete Legislative Update, click here. 

Posted November 08, 2013

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