Quick Reference for IRS-Issued Notice Concerning FSAs

What has changed?
On October 31, 2013, the Internal Revenue Service (IRS) issued Notice 2013-71 providing that a cafeteria plan may allow up to $500 of a participant’s balance at the end of the plan year to be carried over into the next plan year and used for eligible medical expenses incurred during that next plan year.

Is the change mandatory?
The change announced in Notice 2013-71 is optional. Cafeteria plans are not required to permit this carryover.

What are the implications if my organization does decide to permit the $500 carry over?
This change does not affect the maximum amount that may be contributed by a participant to an FSA for a plan year and does not reduce the participant’s maximum FSA contribution for the next plan year. Therefore, a participant who carries over $500 from Year 1 to Year 2 and contributes $2,500 to his or her FSA for Year 2 could receive reimbursements for up to $3,000 of eligible medical expense during Year 2 from his or her FSA.

What does my organization need to do in order to make this change?
A plan may not offer a participant the option to carry over an unused amount and allow a grace period. In order for a participant to be able to carry over unused amounts, any grace periods must be removed from the existing plan and the plan must then be amended to permit a carryover.

Grace Periods:
Plan sponsors who currently offer a grace period will need to decide whether the grace period or the carryover option is a more desirable plan design. If the carry over option is more desirable, then the grace period provision must be removed prior to permitting carryovers.

Amendments to Existing Plans:
Plans are not required to adopt either the carryover option or a grace period option. However, if your organization wants to permit carryovers, the grace period must be removed (if present) from the existing plan and then the amendment allowing a participant to carry over up to $500 of unused amounts must be adopted on or before the last day of the plan year from which unused amounts are to be carried over. So, your plan needs to be formally amended by December 31, 2014, if the carryover option is being adopted for 2014 for a calendar year plan – or any time before the last day of the plan year that begins in 2014 to permit carryover of amounts from a plan year beginning in 2013.