Recent IRS changes will allow employers to amend their Section 125 Cafeteria plans to include a $500 carryover option. In the past, the Flexible Spending Accounts (FSA) have been set up as a use-or-lose program. If an individual put more money into the plan than the medical expenses incurred for the year, they would lose the excess. Notice 2013-71 will now allow employers to amend their plan documents to include this carryover provision, which will allow individuals with excess contributions to carry over up to $500 of the excess to the following plan year.
In 2005, an employer might have amended their plan to allow expenses incurred in the first 2 ½ months after the plan year to offset prior year benefits. This provision is not permitted if the carryover option is elected. If the plan is being amended to include the carryover option, the plan must also be amended to eliminate the 2 ½ month grace period provision. Before eliminating the grace period please verify that there are no constraints.
This carryover provision will allow employers to reimburse employees for qualified medical expenses incurred any time during the following plan year. The carryover amount does not affect the $2,500 maximum permitted health FSA contribution. This would allow an employee to have up to $3,000 in their cafeteria plan. These amounts can only be used for qualified medical expenses.
The carryover provision can still be used for 2013 as long as the plan is amended on or before the last day of the plan year. The proposed regulations also allow non-calendar year 125 cafeteria plans the flexibility to make changes in salary reduction elections. The relief is available to an employer with a non-calendar year Section 125 plan with a plan year beginning in 2013.
It is somewhat difficult to determine future medical expenses. This provision will allow for additional flexibility in the use of employee cafeteria plan dollars. For further information on this carryover option, please contact me or your Barnes Dennig representative.