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New IRS Notice Allows FSA Carryover

March 2017

Big news from the IRS yesterday as they released Notice 2013-71, which offers FSA (flex spending account) participants to rollover up to $500 at the end of the plan year instead of a 2.5-month grace period. The notice also allows participants to use that money for the old or the new plan year.

This option can be elected by employers, who can either offer the 2.5-month grace period OR the $500 rollover option. Employers can amend their current plan for 2013 to allow the rollover option, as long as they amend it by December 31, 2013. Plans that end on a non-calendar year basis can be amended prior to the plan’s end date.

The rollover option applies to 2013 and 2014 plans, and only to health FSAs. Daycare FSAs still must follow the use-it-or-lose-it rule. The $2,500 maximum contribution limit is still in place for a particular year, but is not affected by the $500 rollover. For example, if an employee carries over $500 from their 2013 FSA into their 2014 FSA, he or she can still contribute an additional $2,500 in 2014, totaling $3,000 in the FSA for the year.

The notice from the IRS also creates more flexibility and more time for participants to spend their FSA monies. You may use the money for expenses incurred during the new plan year or during the previous plan year, and you are no longer limited to just 2.5 months for spending any of the funds.

Although these two options are available, employers are not required to offer either the carryover or the 2.5-month grace period. And, it’s important to note you can’t offer both – if you choose one of the options, the other is no longer available.

If you would like to amend your plan to allow the rollover instead of the 2.5-month grace period, please contact your account manager or benefits advisor at Peel & Holland.

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