Addressing long term concerns over the "use-or-lose" provision of Section 125 Health Flexible Spending Accounts (FSAs), on October 31 the Treasury and IRS announced that employers would be allowed to amend their plans to give participants the opportunity to carry over up to $500 into the next plan year for the reimbursement of qualified medical expenses. This new flexibility is aimed at increasing participation and lessening the degree of potentially unnecessary year-end spending that some participants undertake to avoid forfeiting unspent plan dollars left because of the difficulty to accurately predict what out-of-pocket health expenses may be incurred during a 12-month period.
Employers may rely on the new guidance immediately such that if a plan sponsor amends their plan prior to the end of the current plan year, participants will be able to carry over amounts from the plan year that began in 2013. Key elements of the new provision include:
- the ability to offer either the new carry over provision or the presently allowed grace period but not both, (although plan sponsors are in no way required to offer either),
- amounts carried over will not affect the maximum allowed plan year election amount of $2500,
- unused amounts in excess of the allowable carry over of $500 will continue to be forfeited by the participant, and
- the option for plan sponsors to define a carry over amount of less than the $500 maximum allowed.
Before moving ahead with any related plan amendment, plan sponsors will want to consider the specifics of their current plan design and administration to determine which course may be the best way forward for themselves and their participants. Considerations include how amending the current year's plan may affect participants who undertook their planning with the current plan design in mind; how a carry over amount might affect HSA participants (who are ineligible for contributions while they have access to FSA dollars), and how prepared their FSA vendor is to administer the new provision. Once a decision has been made, plan sponsors will need to clearly communicate the changes to their plan participants.
SECTION 4980 TRANSITION RELIEF Clarified
In the same press release, the IRS also clarified that small employer sponsors of cafeteria plans with a 2013 non-calendar year plan could allow participants to prospectively change or revoke their 2013 cafeteria plan election (or to make an initial election) in the absence of a qualifying life event
. The reason behind this unusual opportunity is the initial opening of the Marketplace Exchanges which, while not considered a qualifying life event, could still significantly impact a participant's cafeteria plan choices. In December 2012, the IRS announced this transition relief for larger employers, and with this latest announcement, has provided the same relief for smaller plan sponsors.
Plan sponsors may:
- be more restrictive (e.g. provide a defined one-month period for any participant to make non-qualifying event changes), but not less restrictive,
- fully follow the proscribed guidance that allows changes to be made any time during the plan year that began in 2013,
- decide to adhere to the usual qualifying event standard for any changes requested during the plan year.
The "use-or-lose" provision has been a key component of health FSAs for the past 30 years. This move is a significant step that might encourage greater participation by eliminating some of the risk that always concerns potential plan participants, especially lower income wage earners who may be less risk tolerant. Over the next months, it will be as important as ever, (if not more so), for plan sponsors to be clearly communicating with their participants to help them understand their options during this time of continued change in the employee benefits landscape.
For the full text of IRS Notice 2013-71 describing both of these changes, click here