As the end of the year draws to a close, owners of health flex spending arrangements contemplate how they can utilize any remaining account balance to avoid losing those dollars at the close of the year. The use-or-lose rule applicable to flexible spending arrangements (FSAs) forces owners to use their flex dollars by the end of the year or lose them. However, owners are about to get a small break from the race to empty the account by year end.
In Notice 2013-71 the IRS issued guidance that modifies the use-or-lose rule for health flexible spending arrangements. The use-or-lose rule for health FSAs is currently set forth in proposed regulations under IRC Section 125. The proposed regulations under IRC Section 125 permit cafeteria plans to be amended to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, if the plan does not also incorporate the grace period rule. The $500 carryover does not affect the maximum amount of salary reduction contributions that the participant is allowed to make under IRC Section 125(i). Notice 2013-71 describes how and when to amend an IRC Section 125 cafeteria plan document to adopt the carryover provisions.
The preamble to proposed regulations under IRC Section 4980H provides transition relief from the election rules in Proposed Treasury Regulation Section 1.125-2 for salary reduction elections under an IRC Section 125 cafeteria plan for an employer-provided accident and health plan with a non-calendar plan year beginning in 2013. Notice 2013-71 explains that relief is generally available to an employer with an IRC Section 125 cafeteria plan non-calendar plan year beginning in 2013, whether or not the employer is an applicable large employer or applicable large employer member under IRC Section 4980H. The notice also provides that an amendment to an IRC Section 125 cafeteria plan adopted in accordance with the transition relief may be more restrictive, but not less restrictive, than the amendments described in the transition relief.
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