IRS Relaxes “Use It or Lose It” Requirement for Flexible Spending Accounts

By: Christine Worthen

On October 31, 2013, the IRS issued Notice 2013-71 which relaxed the so-called “use it or lose it requirements” for health flexible spending arrangements (“FSA’s) for the first time in thirty years.  Prior to the issuance of the guidance, participants in a health FSA who did not spend all of the funds held in their FSA during a plan year forfeited any unused amounts at the end of the plan year.  While the IRS did permit plans to adopt a grace period to permits plan participants to spend down their accounts for up to two and one-half months following the end of a plan year, never has the IRS permitted plan participants to rollover unused amounts to the following plan year citing a violation of the rules prohibiting deferrals of compensation.  With the issuance of the guidance, plan sponsors may now amend their health FSA’s to provide that up to $500 of unused funds may be used during the following plan year so long as the plan does not also permit the two and one-half month grace period.  Further, the $500 carryover does not count against the $2,500 FSA maximum.

Plan sponsors who wish to take advantage of the new rules must amend their plan to incorporate the new guidance.  Amendments must be timely adopted and there is still time to take advantage of the guidance during the 2013 plan year.

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