On October 31, 2013, the Department of Treasury issued guidance in the form of Notice 2013-71 that modifies the health flexible spending accounts (FSAs) "use-it-or-lose-it" rule. The guidance allows for a rollover of up to $500 in unused FSA funds effective for the 2014 plan year. The guidance also allows employers who do not currently provide for a grace period to permit employees to roll over up to $500 at the end of the current 2013 plan year.
To take advantabe of this guidance, the Section 125 Cafeteria Plan must be amended on or before the last day of hte plan year from which the amounts may be carried over. The department also issued a press release and fact sheet on the guidance.
If a plan currently provides for the 2 1/2 month grace period, and it is amended to add a carryover provision, it must also be amended to eliminate the grace period by no later than the end of the plan year from which amounts may be carried over. At this writing, it is unclear whether it is permissible to make changes for the 2013 plan years where the grace period has been adopted. The guidance indicates there may be "non-code legal constraints."
We believe it is important for employers to quickly make decisions on if and when they will take advantage of this welcomed new guidance. This new feature should make FSAs more attractive to both employees and employers. It is unfortunate timing that the guidance was issued as most employers are preparing for 2014 benefits open enrollment.