Management's Workplace Lawyers

Health Flexible Spending Account Carryovers Permitted for 2014

November 26, 2013

The IRS has issued a guidance that permits employers to amend their health flexible spending account (FSA) plans to allow employees to carry over up to $500 from their 2013 health FSA accounts to 2014.

Normally, any unused amounts in an employee’s health FSA account is forfeited at the end of the year, which leads to employees scrambling to incur reimbursable medical expenses by December 31.  The new rule enables employers to amend their FSA plan to permit the carryover.  The amendment must be adopted by the last day of the plan year from which the amounts are to be carried over; thus, for 2014 carryovers to 2015, the plan must be amended by December 31, 2014 (for calendar year plans).  Given that the end of 2013 is fast approaching, however, the IRS provided a special transition rule for 2013 – the actual amendment can occur up until the last day of the 2014 plan year, as long as the plan is operated in compliance with the IRS guidance.

The carryover rule does not apply to plans that have a “grace period,” by which employees are granted up to 2½ months into the next plan year to incur expenses that can be reimbursed from the previous year’s account contributions.  The grace period must be eliminated from the plan if the employer wishes to implement a carryover provision.

This rule change does not affect or apply to dependent care FSAs or to health savings accounts (HSA) (which already permit carryovers, but must be tied to a high-deductible health plan).