Last year, the IRS modified the health flexible spending account (FSA) rules so that plans could allow participants to carry over up to $500 of unused contributions into the next plan year. This change to the “use-it-or-lose-it” rule could be implemented only if the FSA did not have a grace period. A grace period is a period of time after the end of the plan year during which participants can continue to incur eligible health care expenses to be reimbursed from the prior year’s FSA.
Some employers prefer the carry over and some prefer the grace period. The grace period allows participants to use any amount of unused contributions but only for 2-1/2 months after the end of the plan year, while the carryover limits to $500 the amount that can be used in the next plan year, but it can be used for the entire year.
If a plan wants to implement the carryover, the documents for the plan must be amended by the last day of the plan year from which the amounts may be carried over. For calendar year plans, that requires getting documentation in order by December 31, 2014 to carry over funds from 2014 into 2015.