FSA Rollover…An Early Christmas Present From the IRS!


When people hear or see the acronym – IRS – they generally do not associate it with gift giving.  But that is precisely what the IRS delivered on October 31, 2013 in the form of Notice 2013–71, which allows for a partial carryover of unused FSA funds (click – http://www.irs.gov/pub/irs-drop/n-13-71.pdf). The often cited “use it or lose it” rule deters many otherwise eligible Flexible Spending Account (FSA) enrollees from setting aside funds on a pre-tax basis for future use.  However, with the issuance of Notice 2013-71, the IRS is allowing the option of a rollover of up to $500 at the end of the FSA plan year…even for 2013 plan years!  This is great news for FSA plan participants and employers alike.
Back in 2005, the IRS issued a similar relaxation of the code, which allowed for a 2.5 month grace period in which plan participants could continue to incur FSA reimbursable expenses (see IRS Notice 2005-42; click – http://www.irs.gov/pub/irs-drop/n-05-42.pdf ).
Since plan participants still faced the prospect of forfeiting unused balances at the conclusion of the grace period, this provision seemingly had little impact on increasing FSA plan participation.  The allowance of up to a $500 rollover, if effectively communicated, should have the effect of increasing FSA plan participation, thus saving eligible individuals, and their employers, valuable tax dollars. (Note: according to a recent CNN Money article, approximately 14 million families participate in FSAs.)
Here is a summary of the IRS notice, and some things for employers and plan participants alike to keep in mind:
  • Employers have the option of the 2.5 month grace period, OR the partial $500 rollover, but NOT both.
  • Employers that currently have the 2.5 month grace period can adopt the $500 rollover in lieu of the 2.5 month grace period, but must make the appropriate plan amendment to remove the 2.5 month grace and add the $500 rollover.
  • Employers electing to take advantage of the $500 rollover must amend their FSA plan documents accordingly. 
  • 2013 calendar year plans can be amended up to the end of the year
  • Non calendar year plans have until the end of the plan year to amend their plan (e.g., a 4/1/13 FSA plan has until 3/31/14 to make the amendment)
  • Employers can opt to implement the provision in their 2014 plan at renewal
  • The $500 rollover ONLY applies to unreimbursed eligible medical/dental/vision expenses.  It does NOT apply to dependent daycare.
  • Employers offering FSA plans are NOT required to offer either provision.
  • The $500 rollover does NOT affect the $2,500 annual cap on unreimbursed medical/dental/vision expenses, imposed by the Affordable Care Act (ACA).  So an employee can “flex” $2,500 in their 2014 plan year, and add the $500 rollover from their 2013 plan year, giving them $3,000 for the new plan year.
  • Plan participants may use the $500 rollover for expenses incurred either in the 2013 or the 2014 plan year.
  • Employers should contact their FSA plan administrator, and/or Broker/Consultant, about the necessary fees, forms, and timeline associated with implementing the $500 rollover provision.
Since I’m writing about FSA’s, and we’re in the midst of “open enrollment season”, I thought I’d add one more item to this week’s post, relative to FSAs and HSAs (Health Savings Accounts).  The IRS allows eligible employees to have BOTH an FSA and an HSA, with certain restrictions.  The most commonly utilized compliance option is to offer employees that have HSAs a so called “Limited Purpose FSA”.  A limited purpose FSA is restricted to reimbursing expenses associated with Dental, Vision, and Preventive Medical Care only.  Employers offering both Traditional and HSA Qualified Health plans that choose to offer FSAs to their employees must offer both “traditional” and “limited purpose” FSAs.  
Here’s what they look like, side by side:
Traditional Health Plan
HSA Qualified Plan
FSA Type:
Limited Purpose
What’s Reimbursable
ANY eligible expense (e.g., Medical, Dental, Vision; per IRC 213(d))
ONLY Dental, Vision, and Preventive Medical Care
Maximum Election
Up to $2,500
Up to $2,500
Dependent Daycare
Up to $5,000
Up to $5,000
IMPORTANT: Since HSAs can also be used for dental, vision, and preventive medical care; it may not make sense to have BOTH an HSA and an FSA.  However, If a participant anticipates having a high dollar dental or vision expense during the plan year (e.g., braces, crowns, lasik eye surgery, etc.), it would make sense to use the limited purpose FSA for the eligible dental/vision expense, and spare their HSA balance).