“Use It Or Lose It” Softened For FSA Participants
What Does It Mean For 2013 and 2014?
The U.S. Department of Treasury and the IRS have released a notice modifying Flexible Spending Account (FSA) plans to allow either a $500 carryover per employee per year, or the current a 75 day grace period to “spend down” all allocated assets in the plan. The introduction of the carryover rule will provide great flexibilities to plan sponsors who would like to allow their participants some relief when worrying they will lose their money if they don’t use it.
If the FSA does not incorporate the current grace period rule, § 125 cafeteria plans will be able to allow employees to rollover up to $500 of unused amounts for reimbursement for qualified medical expenses in the following plan year. The modification also gave some plan sponsors the ability to incorporate this rule for the current plan year, and all sponsors the ability for any plan years going forward.
Should I Incorporate The Rule For 2013?
If you are eligible to change the plan for 2013 it may still be impractical, and there are a number of issues which need to be considered.
- The systems which are used to administer the FSA were just notified of the modification as well, and were not prepared for the change. Therefore, FSA software vendors are going to have to begin coding their software immediately, which may not provide a smooth transition for employees on January 1st of 2014.
- Employees may be planning to use their “grace period” dollars. While it may seem the 75 day grace period is only a means for employees who allocated too many funds to quickly “use it” before they “lose it,” savvy employees may be planning to utilize the funds for expensive procedures not covered by other benefits. As an example, a $5,000 Lasik procedure performed in January of 2014 can paid for by $2,500 of 2013 FSA dollars and $2,500 of 2014 FSA dollars.
- Modifying the plan, and properly communicating the changes to the employees in a timely fashion may be unrealistic. The time it will take to evaluate the option to adjust the plan, executing the change, and provide the proper employee notices of the modification may fall too close for comfort to 2014 for many companies.
What About 2014?
Whether a plan should utilize the “grace period rule,” the “carryover rule,” or neither is a decision that needs to be evaluated by every company currently offering an FSA plan. Each option poses positive and negative effects for the sponsor and the participants. It is important to note that most FSA forfeitures are for amounts less than $500, and by relieving this burden to employees may increase employee participation to the plan.
Read the original press release on the U.S. Department of Treasury website: