IRS to Allow $500 Rollover in FSAsNovember 20, 2013
In recent weeks, the IRS announced a loosening of the rules governing Flexible Spending Arrangements (FSAs) which will allow employers the option of letting their employees roll over as much as $500 from year to year. Previously, FSAs have been fully use-it-or-lose-it where any unused funds are essentially forfeited.
The impetus behind the change is the lower contribution limit allowed under the Patient Protection and Affordable Care Act (PPACA) which is $2,500 for 2013 and in subsequent years.
To ease the use-it-or-lose-it rule, Treasury in 2005 allowed for a two-and-a-half month grace period in which employees could continue to utilize the FSA into the following year. The new rule change will allow employers to either offer the grace period or the $500 rollover, but not both.
For employers that offer an FSA plan to employees but do NOT allow for the grace period, they will have the option of allowing employees to rollover up to $500 at the end of this year. Employers who do offer the grace period within their FSA plan, they would have to amend their 2014 plan to cut the grace period in order to allow for the $500 rollover. Meaning, only employers currently offering FSAs without the grace period can take advantage of the rollover in 2014 while all others will have to wait to implement these changes until 2014.
Another key provision in the rule change is that employers do not HAVE to offer the rollover, and if they do, it doesn’t have to be the full $500, it could be less provided it applies equally to all employees.
Click here to read the fact sheet from IRS.