New Health FSA Rules for 2014 (how it will benefit you!)

With the rising cost of health care, we are all looking for ways to reduce our overall cost. One way to do that is through pre-tax contributions to a health flexible spending account (FSA). FSAs have gone through some changes recently. First some background, FSAs are part of a cafeteria plan, which do not allow for unused amounts to be carried from one year to another. This is where the infamous “use-or-lose” rule for FSAs comes from.

However in 2005, the IRS amended this rule to allow for a 2 ½ month grace period, following the plan year end. During the grace period participants could use any remaining funds left in the FSA in the first 2 ½ months of the following plan year. This caused participants to spend the funds on unnecessary items because they were afraid of losing the funds.

Then starting in 2013, the IRS limited the total amount a participant could contribute to $2,500 per year but still maintained the “use-or-lose” rule.

On October 31^st the IRS released Notice 2013-71 which relaxed the previous “use-or-lose” rule. These relaxed rules allow participants to carry over up to $500 per year, depending on their specific plan. The carry over amount does not count towards the contribution limit for the year. However, in order for the plan to allow any amount to be carried over, it cannot have the grace period. This means that in order for a plan to allow the $500 carry over from 2013 into 2014, the plan must be amended prior to the end of 2013 plan year to remove the grace period.

It's good that the IRS is allowing funds to be carried from one year to the next, but it may not be a guarantee that your specific plan will allow the a $500 carry over, a smaller carry over, or any carry over at all. It's a good idea for both employers and employees to review their plan documents to see what they can carry over.

If you have any questions please give us a call at 609-953-1400 or email us at info@paddencooper.com

Adam Necelis, CPA

Padden Cooper, LLC Medford, NJ

Adam Necelis | 12/19/2013

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New Health FSA Rules for 2014 (how it will benefit you!)