The IRS recently released Notice 2013-71 which modifies the “use it or lose it” rules for Flexible Spending Accounts to allow for unused funds to be carried over from one year to the next. This should be welcome relief for FSA plan participants and employers alike. Below is a snapshot of the Notice:
- Plan sponsors may amend their plans to allow a roll-over of up to $500 of unused account funds from one year to the next.
- Any amounts rolled over will not affect the $2,500 contribution limit for future years.
- Employees can roll over the money in any year. There is no limit on the number of years an employee can roll over money.
- The IRS is allowing employers to amend their plans on a retroactive basis to the beginning of the current plan year, i.e., a plan with a January 1 plan year may be amended back to January 1, 2013 to allow employees to roll over funds into 2014.
- A plan with the “grace period” provision is not eligible for this $500 roll-over benefit.
- The roll over provision is only available for health expenses, not dependent day care expenses.
- Unused amounts over $500 will still be forfeited even if the roll-over provision is adopted.
Flexible Spending plans (FSAs) are a valuable, yet too often under-utilized, employee benefit. FSAs are a great way for employees to budget for expected out-of-pocket health expenses (medical, dental, vision) using pre-tax dollars. Any employee spending money on medical copays, dental and vision expenses can set aside up to $2,500 of pre-tax dollars each year to pay for out-of-pocket health expenses saving upwards of $1,000 dollars per year on FICA and federal/state income taxes depending on the applicable tax bracket. Employers also win by reducing their Social Security and Medicare tax obligations when employees participate. Some states, such as California, also allow for FSA contributions to reduce applicable employee wages for workers’ compensation premiums.
The primary reason employees have not participated in plans is because their employers don’t offer them. When employers do make them available, some employees have feared the “use it or lose it” provision of FSAs. The way plans operate is each year at open enrollment the participants make an election to the plan. For example, an employee may want to contribute $1,000 to cover eye glasses and some known dental work in the coming year. Historically, the employee has had to use all the funds set aside in that plan year or the funds have been “lost.” The employee could not recover unused funds from that plan year. Many employees refrain from taking advantage of the great tax benefits these plans offer due to the fear of lost money.
In 2005 the IRS allowed for a grace period up to two months and 15 days after a plan year closed to use funds from a previous year. This was well received, though only a small percentage of plan sponsors adopted this “grace period” provision.
With the new IRS rules in play, now is as good a time as ever to adopt a flex plan if you have not already done so. There is no downside to amending an existing plan to allow for the carryover provision. We expect this change to benefit employees by reducing the need to spend down all their funds at the end of a plan year, and we also expect greater participation due to the reduced risk of participating in a plan. Please contact your Bridgeport representative today about either amending your plan or discussing adding this valuable employee benefit.