In November of 2013 the IRS announced a change to the “use it or lose it” rule governing health Flexible Spending Arrangements (FSAs). This change allows for $500 of unused FSA funds to be “carried over” from one benefit year to the next. While providing a great relief for those who participate in health FSAs, the regulation also left several unanswered questions.
New guidance has been provided to help clarify the regulation, providing a better understanding of how a health FSA that has been carried over into the next benefit year will affect Health Savings Account (HSA) eligibility. The new guidance provided the following information:
- An individual whose health FSA has unused amounts may elect to carry over up to $500 of those funds into a limited purpose FSA or post-deductible FSA. These types of accounts are HSA-compatible, and would not interfere with HSA eligibility, allowing for an individual to contribute to an HSA as well as to keep the unused FSA funds.
- An employer can structure their benefit plan to automatically carry over up to $500 of unused health FSA funds into a limited purpose FSA or post-deductible FSA for individuals who choose an HSA-eligible health plan. This also allows the employee to become eligible to contribute to an HSA and to keep the unused FSA funds, with the benefit of requiring no action on the employee’s part.
- An individual with unused health FSA funds may also choose to forfeit those amounts. This will allow an individual with a very small health FSA balance to become HSA-eligible without making any transition to a different type of account.
- Any individual who is covered by a health FSA as a result of a carry-over of unused amounts from the prior year, and does not elect to carry over into a limited purpose or post-deductible FSA, is ineligible to contribute to an HSA for the entire plan year, even if the carried over funds are exhausted before the end of the plan year.
Carrying over from a health FSA to a limited purpose FSA or post-deductible FSA will be a great option for employers looking to move larger numbers of employees onto high deductible health plans (HDHPs) as well as for individuals looking to make changes to their individual health plans without losing any funds already contributed to a health benefit.
While the regulations still require employers to offer either the $500 carry-over option OR a grace period lasting up to two and a half months, this new guidance offers more flexibility with the carry-over option and will help employers make more educated decisions in their benefits offerings.
Please be aware that these changes may require a modification to your Section 125 plan, so contact your plan administrator if you’d prefer to do this. Since the regulations are brand new, it may take a few weeks for appropriate paperwork to become available.