Treasury Introduces New $500 FSA Rollover Option

On October 31, the US Treasury Department modified its “use-it-or-lose-it” rule to allow for a rollover of Health Care Flexible Spending Account (FSA) funds. This rule change may be the most beneficial FSA development for employers and employees since the FSA law’s inception in 1984.

As documented within Notice 2013-71, this modification permits Section 125 cafeteria plans to be amended to allow up to $500 of unused amounts remaining in a Health Care FSA at the end of a plan year to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year.

For employees, this rule change brings with it the following advantages:

It helps alleviate forfeiture concerns and lead to higher participation and contributions.

It stands to cut back on wasteful year-end spend downs of FSA balances.

The change should come as welcome news to employers, as increased participation and spending stands to generate increased FICA savings.

Plan sponsors now have the choice of either allowing employees a carryover of up to $500 or allowing them a grace period of up to two and a half months (though employers are not required to allow either. A Health Care FSA cannot, however, have both a carryover and a grace period. The plan sponsor also can limit the carryover amount to less than $500.

Immediate Actions:
This rule change comes as calendar year plans have either begun their annual enrollment periods or, at a minimum, finalized their 2014 annual enrollment communications. With this in mind, the following immediate actions are to be considered:

Communicate to Vantagen your FSA rule preference for the next future plan year beginning January 1, 2014 or later at your earliest opportunity. To recap, the options include adopting the $500 carryover (or a lower carryover limit), continuing or adopting the 2.5 month grace period, or operating an FSA without these features.

For those employers who plan to adopt the $500 carryover, Vantagen has prepared an email blast communication and electronic insert that can be issued to employees immediately as an update/supplement to open enrollment communications. Additional actions that draw attention to the change and support enrollment can be will be introduced as part of ongoing open enrollment program execution.

Vantagen is currently considering the feasibility of adopting the $500 carryover for plans operating in 2013. Additional information on this subject will be released in the near future.

Additional Actions:
Plan documents and Summary Plan Descriptions will be updated to reflect the adopted carryover provision, when applicable.

Training, education and awareness specific to rollover spending – internal, client and participant – will be key initiatives tied to change integration. Many new developments tied to this change are expected to unfold in the weeks and months ahead.

Employee benefits communications will be updated to include the carryover provision when applicable. As standard, existing materials will be exhausted prior to ordering materials that reflect the revised content.