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$500 Flexible Spending Account Carryover

Kegler Brown Health Care News

Effective immediately, the IRS is allowing Flexible Spending Arrangements (FSAs) to be amended so as to allow participants to carry over a maximum of $500 of unused amounts into the subsequent plan year. This $500 carryover is capped every year so there is no accumulation of monies to avoid the FSA being treated as a tax shelter.

The new carryover rule cannot be utilized simultaneously with the grace-period rule (i.e. reimbursements paid up to two and half months after plan-year close). Thus, if the plan sponsor elects to amend its plan to take advantage of the new carryover rule, the grace-period rule must be eliminated. A run-out period is still permitted.

Generally, an FSA must be amended before the end of the plan year for which the amendment is to be effective and can be effective retroactive to the beginning of the plan year. However, for the 2013 plan year, the IRS is allowing the plan to be amended before the end of the 2014 plan year and still be effective for the 2013 year. Caveat: the FSA must be administered consistent with the plan provisions as amended between now and when the plan is actually amended. Accordingly, if the employer intends to take advantage of the carryover rule then the plan cannot be administered to utilize the grace-period rule.

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