Frequently Asked Questions About the Health Flexible Spending Account Plan Carryover and Use-it-or-lose-it Rule

Posted by BAS - 05 December, 2013

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The IRS recently changed to the flexible spending account plan use-it-or-lose it rule to allow amounts to be carried over into the next plan year. Employers that have questions about how the new carryover operates may refer to these frequently asked questions for assistance.

1. What is the use-it-or-lose-it rule?

The use-it-or-lose-it rule is an IRS requirement for a flexible spending account plan. In order for contributions to and distributions from an FSA to receive favorable tax treatment, the IRS requires that any amounts left over at the end of the plan year must be forfeited.

2. What is a Carryover?

A carryover is a new feature permitted in health flexible spending account plans starting with the 2013 plan year. If incorporated into the health FSA, a carryover feature allows participants to use up to $500 of remaining health FSA contributions for eligible expenses incurred in the immediately following plan year. A carryover may be included in a health FSA, but not in a dependent care FSA. The amount to be carried over is determined at the end of the run-out period.

3. What is a Grace Period?

A grace period is a permitted feature of health flexible spending account plans and dependent care flexible spending account plans. If the FSA has a grace period, unreimbursed amounts remaining in a participant’s FSA at of the end of the plan year may be used to pay for eligible expenses incurred during the first 2-1/2 months of the immediately following plan year.

4. What is a Run-out Period?

A run-out period is the amount of time following the end of a plan year during which FSA participants may submit expenses for reimbursement for the prior plan year. It is an administrative period for submitting claims, not a period during which expenses may be incurred.

5. Can a carryover be added to both a Health Care FSA and a Dependent Care FSA?

No. The carryover feature is permitted in a health FSA, only.

6. Can we set the amount of the carryover or does it have to be $500?

You may set the amount of the carryover in any amount not to exceed $500.

7. If we add a carryover, does it change the amount employees can contribute to the health FSA for the plan year?

No. Employees may contribute up to $2,500 to the health FSA whether your plan allows a carryover or not.

8. Why would we want a carryover instead of a grace period or vice versa?

A carryover allows up to only $500 to be carried over, but the amount may be used for eligible expenses incurred during the entire following plan year. A grace period allows any remaining amount to be carried over, but the amount may be used for eligible expenses incurred during the first 2-1/2 months of the plan year, only.

9. How do we add a carryover to our FSA?

The written FSA document must be amended to add a carryover provision.

10. Our Plan has a grace period now. We want to allow participants to carryover up to $500 to use during all of 2014. What do we do?

Your plan document must be amended, in writing, by the end of the 2013 plan year to remove the grace period and add a carryover.

11. Our plan has a grace period now. We want to keep the grace period since we already communicated it to employees, but we want to add a carryover to the 2014 plan year. What do we do?

Your plan document must be amended, in writing, by the end of the 2014 plan year to remove the grace period and add a carryover.

12. We think a grace period is better than a carryover. Can we just stick with the grace period?

Yes. You do not have to add a carryover to your plan.

13. We don’t want a carryover or a grace period. Do we have to have either?

No. Your plan does not have to provide a carryover or a grace period.

14. What does it mean to amend our plan?

According to IRS rules, all FSAs must have a written document. Amending the plan means changing the written document to describe the carryover or grace period.

15. Can BAS provide a written document?

Yes. BAS can work with you to document your flexible spending account programs. For more information, contact your account manager or info@BASusa.com.

Topics: HR & Benefits Compliance


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