Finance & Enjoyment Blog

IRS Announces Changes to Health Flexible Spending Arrangements (FSAs)

The Internal Revenue Services (IRS) has modified the rules that apply to health flexible spending arrangements (FSAs?). Plan sponsors now have the option of allowing participants to carry over $500 of unused funds in health FSA to the following plan year. This now eliminates the “use-it-or-lose-it” rule that has affected FSAs in the past.

The structure of FSAs will stay the same; prior to the start of a plan year, employees can decide how much they wish to contribute to a health FSA plan that is part of a cafeteria plan. The maximum amount for 2014 is $2,500. Here are all of the new rules:

Plans may now be amended to allow participants to carry over up to $500 of unused health FSA funds at the end of a plan year.

Any carryover will not count against the $2,500 limit in the next plan year.

A plan may allow participants a grace period, as described above, or the ability to carry over unused funds--but not both.

A plan does not have to allow either the grace period or the carryover option.

To adopt the carryover option, plans must be amended on or before the last day of the plan year from which amounts may be carried over, and may be retroactive to the first day of the plan year, provided certain requirements, including participant notification, are met.

Special rules apply to plan years beginning in 2013 – these plans may be amended to retroactively adopt the carryover provision at any time on or before the last day of the plan year that begins in 2014.

Keep in mind that a health FSA plan cannot have both a grace period and a carryover option. Plans with existing grace periods will have to be amended to remove the grace period feature in order to add carryovers. As noted by the IRS, Notice 2013-17 states that “the ability to eliminate the grace period provision previously adopted for the plan year in which the amendment is adopted may be subject to no-Code legal constraints.”

KKB, your Colorado CPA expert, is ready to answer any questions that you may have on the new FSA rules. We’ll also help you on all your financial planning services for the upcoming tax season. Let us take the worry out of your taxes.

What do you think of the new IRS change on FSAs?

Posted in Rules and Regulations »

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