IRS Allows $500 Carry Forward of Medical Flexible Spending Accounts

December 13, 2013

Medical flexible spending accounts (also known as flex accounts or FSA's) allow employees to fund medical expenses on a pre-tax basis, up to $2,500 annually.  Employee elections to make medical flex contributions are generally irrevocable during the plan year and the flex account must be forfeited to the extent not used for medical expenses during the plan year. In recent years, IRS allowed plans to add a "grace period," to allow reimbursement of employee expenses incurred in the 2½ months after the end of a plan year. Now, IRS is allowing employers to choose between the grace period and allowing a $500 carry forward of unused flex dollars for use anytime during the next plan year. Under the new rules:

Adding a carry forward will encourage employees to participate and reduce the worry about forfeiting unused dollars. This could be very helpful for employers having trouble passing nondiscrimination testing for 125 plans. If adding this provision encourages greater use of the plan, employers FICA taxes are reduced. But, the $500 carry forward could also increase the number of small accounts and increase administrative fees. Employers should also evaluate these aspects of moving to the new rules:

There are lots of considerations in adding a $500 carry forward to an employer's medical flexible spending account plan. Frost Brown Todd's Employee Benefits team is ready to assist you with amendments or evaluating plan changes. 

Medical flexible spending accounts (also known as flex accounts or FSA's) allow employees to fund medical expenses on a pre-tax basis, up to $2,500 annually.  Employee elections to make medical flex contributions are generally irrevocable during the plan year and the flex account must be forfeited to the extent not used for medical expenses during the plan year. In recent years, IRS allowed plans to add a "grace period," to allow reimbursement of employee expenses incurred in the 2½ months after the end of a plan year. Now, IRS is allowing employers to choose between the grace period and allowing a $500 carry forward of unused flex dollars for use anytime during the next plan year. Under the new rules:

Adding a carry forward will encourage employees to participate and reduce the worry about forfeiting unused dollars. This could be very helpful for employers having trouble passing nondiscrimination testing for 125 plans. If adding this provision encourages greater use of the plan, employers FICA taxes are reduced. But, the $500 carry forward could also increase the number of small accounts and increase administrative fees. Employers should also evaluate these aspects of moving to the new rules:

There are lots of considerations in adding a $500 carry forward to an employer's medical flexible spending account plan. Frost Brown Todd's Employee Benefits team is ready to assist you with amendments or evaluating plan changes. 

Attorneys

Practices

Top