Changes have been made to the Cafeteria Plan Rules for FSAs (flexible spending accounts) by the IRS. The change affects the “use-it-or-lose-it” rule that once required all of the funds to be allocated by the last day of the year or it would be forfeited by the employee. Now, if an employer elects to amend their plan, employees are able to carry over an amount not to exceed $500 into the next year.
This new rule is mainly an attempt to prevent employees from taking part in optional medical procedures. It has become common to do so in order to spend the funds still in the FSA account that would otherwise be lost. Now, extra funds up to $500 can be used to reduce medical costs in the following plan year.
With the IRS it seems there is always a trade. It is important to know that the grace period and the rollover cannot be used at the same time in conjunction with each other. If plan sponsors decide to take advantage of the new rule, the grace period in FSA accounts will be eliminated. This grace period has allowed the employee to pay for expenses with a prior year’s account balance during the first 2 ½ months of the following year up to any amount. If the new option is chosen, they will only be able to use $500.00.
Contributions Stay the Same
Per IRS Notice 2013-71, the maximum amount of money that can be placed into a FSA account annually by an employee is $2,500. This amount is not changing for 2014. Therefore, it will be possible to have up to $2,500 in salary reduction contributions plus use up to $500 carried over from the previous year.
Effect on Employers
Employers need to consider a few things before updating the plan to the new option. FSA plan administrators might apply a fee for any plan amendments, which would be the employer’s responsibility. In addition, an FSA plan change may require SPD’s (Summary Plan Description) to be redistributed. The change does not bring major benefits to employers other than having the ability to provide more flexibility to employees, and possible gain more participation.
There has been no change to the employer risk involved when FSA funds are reimbursed in advance of being deducted from the employee’s check. Should the employee have spent their entire year’s reimbursement early in the year and quit, be fired, or be medically unable to work, the employer has not collected the full amount that has been paid out. The employer cannot recoup the funds lost, as the law does not allow for the funds to be taken out of a final paycheck or 401(k). The risk should be carefully considered when determining benefits for an FSA account and the plan allowances.
For assistance in determining the best option for your organization, or for questions regarding FSA plans in general, please contact our Insurance Solution Specialist, Danielle Sweet.