The New FSA $500 Carryover Provision

Posted December 11, 2013 Company News

We know that

  • If an employer wants to amend the plan to include the $500 carryover for 2013, the amendment must be adopted before the end of the 2013 plan year.
  • Any plan that includes the 2 ½ month grace period provision now must be amended to remove it, and then the plan can be amended to include the $500 carryover.
  • For plans that add the $500 carryover, the current plan year money must be spent first, carried over funds are spent only after current year election is exhausted.
  • The maximum that can be carried over is $500, but the plan may specify a lower amount as the permissible carryover maximum.
  • Plans may set a minimum amount to be carried over.
  • Example 4 in the IRS Notice illustrates that employees have access to unused FSA funds (carryover balances) in years that they elect no salary reduction for the health FSA.
  • The $500 does not affect or count against the indexed $2,500 salary reduction limit applicable each plan year.

We do not know

  • Whether an employee with a general-purpose FSA carryover balance, who elects not to participate in the FSA for the new plan year, is permitted to contribute to an HSA beginning in the new plan year. For now it appears that a carried over balance will preclude individuals from contributing to an HSA, unless the participant can waive the balance or convert the unspent funds to a limited-purpose FSA. We anticipate further guidance on this subject matter.
  • How burdensome and costly the process will be for FSA administrators to reimburse non-participants with carried over balances.

 

References:

IRS Notice for new FSA provision

 

 

 

Please note that the information contained in this document is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This document should be reviewed by your legal counsel or tax consultant before use.

Additionally, the messages and content within the Pittsburgh Health Care Reform group do not reflect the advisory services of Henderson Brothers, Inc.


 

Contributing EXPERT: Shari Herrle

 

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