Health FSAs: “Use-it or lose-it” Rule Becomes “Use-it or lose-most-of-it”

Rebecca Dobbs Bush
November 21, 2013 — 1,096 views  

In the wake of Health Care Reform, we have seen quite a few changes to the rules relating to HSAs, FSAs and HRAs. Now with Notice 2013-71, the IRS has announced yet another change to the rules relating to health FSAs. Designed to encourage participation in health FSAs, the IRS is permitting (but not requiring) plans to allow participants to carry over balances into the next plan year in amounts up to $500.

The prior rules allowed for a grace period of up to 2 ½ months beyond the end of the plan year for participants to submit expenses. Beyond that, however, a participant stood to lose any amounts they contributed to a health FSA and didn’t use. This “use-it or lose-it” rule often deters many from participating due to the fear of leaving money on the table. In the alternative, the “use-it or lose-it” rule encourages wasteful spending with participants trying to incur additional unnecessary medical expenses near the end of the plan year in order to use up their account balances.

If an employer wants to implement the carryover allotment, the health FSA plan would need to be amended by the end of the plan year beginning in 2014. However, the notice also indicates that an employer cannot maintain both a grace period and a carryover allotment during the same plan year. Since a plan cannot remove their grace period retroactively, a plan currently utilizing a grace period needs to implement the necessary amendments by the end of 2013.

An employer wishing to implement the carryover allotment should work with counsel to ensure the appropriate amendments are adopted by their health FSA. In addition, for those employers currently utilizing a grace period, a review of current participant account balances would be prudent before taking any action. After all, with it being close to the end of a calendar plan year, participants may be planning to use more than the $500 carryover allotment during the existing grace period. A review of account balances would provide insight to an employer as to whether implementing the amendments for the 2014 plan year would be a welcome revision by its employees.

Rebecca Dobbs Bush

SmithAmundsen LLC

If you have questions on this article or other employment law topics, please contact Rebecca Dobbs Bush at 630.587.7928 or [email protected] Rebecca is also a contributor to the Labor & Employment Law Update at www.laborandemploymentlawupdate.com.