• FSA Use It Or Lose It Rule Modified
  • November 21, 2013 | Author: Eva A. Rasmussen
  • Law Firm: Clifton Budd & DeMaria, LLP - New York Office
  • For nearly 30 years, participants in health Flexible Spending Arrangements (“FSAs”) have been subject to a “Use-It-or-Lose It” rule. This rule requires that any unused balances that cannot be used for expenses incurred prior to the end of the plan year (or, if the plan provides, prior to the end of a 2-½ month grace period) must be forfeited.

    On Halloween, the IRS issued Notice 2013-71 which provides that a cafeteria plan without the 2 ½ month grace period may be amended to permit up to $500 of unused amounts to be carried over to the following plan year. The new rule is intended to provide greater flexibility, encourage lower-income employees to participate in FSAs and to minimize unnecessary spending at the end of the plan year.

    Whether or not a plan permits the carryover of unused funds, a participant may still contribute the full salary reduction amount of $2,500 in the following year. A plan may have a carry-over feature or a grace period but not both for the same year. For example, a calendar year plan permitting a carryover to 2015 of used amounts contributed in 2014 may not have a grace period in 2015 but could have had a grace period during the first 2-½ months of 2014 (for 2013 contributions).


    The next steps for an employer will depend on whether the existing FSA includes a grace period:

    • (a) FSAs With a Grace Period - Employers should consider whether this carry-over feature will be more beneficial for plan participants than the grace period. If the salary reduction contributions are low, the carry-over provision may be more beneficial as it will allow participants to incur expenses over the following plan year to use up the $500. The FSA could be amended to permit a carry-over for the 2014 plan year before the end of the 2014 plan year. Although the Notice requires that participants must be notified, it does not specify when the notification must occur. It will be most helpful to participants if they are notified during the enrollment period for 2014 (usually in November - December of the previous calendar year for calendar year plans) so that they can consider the permissible carry-over or the grace period in making their elections for 2014. The FSA could be amended to eliminate the grace period and add the carry-over provision for the 2013 plan year but the amendment would have to be adopted within the 2013 plan year. However, a participant who was expecting to be able to se the grace period for 2013 will be disappointed if the change results in a forfeiture of his account, and litigation could occur. Therefore, this approach should only be considered if the employer can be sure it is supported by all participants in the FSA.
    • (b) FSAs Without a Grace Period - An FSA without a grace period may be amended to add the carry-over provision for 2013 before the end of the 2014 plan year. Participants should be notified as soon as possible.