A long standing tradition of health flexible spending accounts (FSAs) was the "use it or lose it" feature which bothered many participants and forced them to guess correctly or lower than the amount of funds they need to contribute in a plan year for the account.
The IRS released new guidance allowing an FSA to carryover $500 dollars from one plan year to the next. This new feature requires that the account does not apply the "grace period" rule which allowed the account to be used up after the plan year but before the deadline to submit claims under the plan.
This means an FSA can now choose between at least three different options at the end of the year for qualified expenses.
- Require all claims to be incurred during the plan year period.
- Require all claims to be incurred during the plan year and allow up to $500 to be rolled over into the new plan year.
- Allow a grace period where claims are incurred during the plan year and up to the deadline for submitting claims of the prior plan year.
Careful consideration should apply when moving from a grace period approach to a new $500 rollover approach because this also means a takeaway of a right or feature under the plan, bringing into play fiduciary and ERISA notice obligations.
Careful consideration should also apply for plans with HSA participants because these options may affect HSA eligibility requirements under federal and state tax law.
Last but not least, COBRA, TPA administration and costing may also come into play for this decision. Depending on your choice, one feature may add administration and costs to the plan or reduce funds used to offset plan expenses.
If you need help understanding these rules, please contact Kinney & Larson.