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IRS Relaxes the FSA “Use it or Lose it” Rule for 2013

On Oct. 31, 2013, the Internal Revenue Service (IRS) says employers can allow participants to carry over up to $500 in unused funds into the next plan year. If your plan has a grace period*, it must be eliminated if the carryover is adopted. The plan may also be amended to specify a lower carryover amount, as well as not permit any carryover at all.

To take advantage of this new modified rule for 2013, employers must amend their section 125 cafeteria plan document in writing before the last day of the plan year. The adopted amendment can be effective retroactively to the first day of that plan year, as long as you inform the participants and follow the rules in the Notice, including the following:

  • The same carryover limit must apply to all plan participants.
  • FSA cannot be cashed out or converted to any other taxable or nontaxable benefit. The carryover may only be used to pay or reimburse medical expenses incurred during 2013 or 2014.
  • The plan may not allow participants to contribute more than the $2,500 limit, or be reimbursed for more than $2,500 plus $500 carryover.
  • Any unused amount in excess of $500 (or a lower amount specified in the plan) remaining at the end of the run-out period for the plan year will be forfeited.
  • Any unused amount remaining in the participant’s FSA will be forfeited upon termination of employment (unless the employee elects COBRA coverage).

For more detail, see

*Grace period: The IRS allows employers to offer an extended deadline, or grace period, of two and a half months after the end of a plan year to use remaining health FSA funds. If a plan has provided for a grace period and is being amended to add a carryover provision, the plan must also be amended to eliminate the grace period provision by no later than the end of the plan year from which amounts may be carried over. 

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Erin Woulfe
Erin Woulfe
Erin Woulfe likes to write about things that matter. Keeping her finger on the pulse of what’s happening in the public sector world, she blogs about the latest legislative news and employee benefit trends that affect our school, city and county clients. She’s been with NIS since 2002. “I love connecting to our clients and providing them with the tools they need in order to administrate their plan,” says Erin. “Whether that be materials to educate their employees on certain benefits, how to effectively communicate change within an organization or just providing tips and how-to’s to help them make their job easier.”

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