November 15, 2013
IRS Modifies 'Use or Lose' Rule; Employee Communication Materials Available
With Notice 2013-71, the Internal Revenue Service (IRS) modified the longstanding "use it or lose it" rule for Health FSAs to allow taxpayers to carryover up to $500 of unspent FSA funds to the following plan year.
- Plan sponsors may adopt either the new Carryover option or the previously-available Grace Period option, but not both.
- Although the IRS will allow a carryover of up to $500, your plan may allow a lower annual carryover amount, or no carryover at all.
- Any amount carried over does not count against an employee’s annual $2,500 FSA limit.
The IRS ruling is effective immediately. Employers can choose to adopt the Carryover for as early as the current (2013) plan year. Issuance of a summary of material modification (SMM) is needed to add the Carryover and, if appropriate, to remove the Grace Period. We encourage you to read IRS Notice 2013-71 in its entirety to learn more details and view examples of how the ruling applies to various situations. You might also want to review the one-page fact sheet summarizing the ruling also published by the IRS.
Modification of the 'Use It or Lose It' rule creates a major opportunity for your employer groups to increase employee FSA participation rates. We have created basic education materials to help you communicate the new Carryover option to employees during enrollment. Easily customizable for your groups, these are available for download and include the following materials:
The above links provide sample documents in .pdf format. The same documents in Word format can be downloaded from inTouch; just log on, select "Marketing Materials" under Client Tools, and select the DataPath 125 tab.