CAFETERIA (FLEXIBLE SPENDING ACCOUNT) PLANS
(Modification to Use-it-or-lose-it Rule)
A significant planning issue for cafeteria plan participants (particularly health care and dependent care FSAs) is the so called “use-it-or-lose-it” provision. An employee who elects to put $2,300 of the pre-tax compensation into their health FSA for the year, but only has $1,500 of qualifying expenses, will forfeit the other $800 under this rule.
IRS Notice 2005-42 allows employers to amend their cafeteria (flexible spending account) plans to provide for a 2½ month expense grace period immediately following the end of the plan year. The advantage of the grace period is that expenses for qualified benefits incurred during the grace period may be paid or reimbursed from benefits or contributions remaining unused at the end of the immediately preceding plan year. A sample plan 2½ month grace period amendment form follows on the next page.
IRS Notice 2013-71 allows employers to amend their cafeteria (flexible spending account) plans to provide that up to $500 of any amount remaining unused as of the end of the plan year can be carried over to the immediately following plan year. The up to $500 carryover may be used to pay or reimburse medical expenses under the plan incurred during the full plan year to which the carryover is made. Any said carryover amount shall not count against or otherwise affect the index salary reduction limit, applicable to each plan year under IRC §125(i) (e.g. $2,500 for 2013 and 2014). Any unused amount in excess of $500 (or a lower amount specified in the plan) that remains unused as of the end of the plan year is still forfeited.
A plan may be amended to carryover this provision for a plan year that begins in 2013 at any time on or before the last day of the plan year that begins in 2014. A sample plan up to $500 carryover amendment form follows on the next page.
NOTE: If a plan previously provided for a 2½ month grace period and is being amended to add an up to $500 carryover provision, the plan must be amended to eliminate the 2½ month grace period provision. The amendment to eliminate the 2½ month grace period must be completed no later than the end of the plan year from which amounts may be carried over.
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AMENDMENT TO
______
CAFETERIA (FLEXIBLE SPENDING ACCOUNT) PLAN
(Adoption of 2½ Month Grace Period)
The Cafeteria Plan of ______is hereby amended to incorporate the additional grace period provisions pursuant to IRS Notice 2005-42. Specifically, the Plan is amended to allow an additional grace period of 2½ months (until the 15th day of the 3rd month after the end of the plan year; i.e. March 15th) during which an employee’s expenses for qualified benefits incurred during the grace period can be paid or reimbursed from benefits or contributions remaining unused at the end of the immediately preceding plan year.
Dated this _____ day of ______, 201_____.
By: ______
NOTE: Pursuant to IRS Notice 2013-17, the above amendment is not permitted for a cafeteria (FSA) plan if the plan contains a provision authorizing a carryover to the immediately following plan year of up to $500 of any remaining unused balance as of the end of the current plan year.
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AMENDMENT TO
______
CAFETERIA (FLEXIBLE SPENDING ACCOUNT) PLAN
(Adoption of up to $500 carryover of any remaining
unused amount at plan year end)
The Cafeteria Plan of ______is hereby amended to incorporate an up to $500 carryover of any remaining unused amount as of the end of the plan year pursuant to IRS Notice 2013-71. Specifically, the Plan is amended to allow an up to $500 carryover of any remaining unused amount to the immediately following plan year during which an employee’s expenses for qualified benefits may be used to pay or reimburse medical expenses under the plan incurred during the full plan year to which the unused amount has been carried. Any such carryover amount shall not count toward an employee’s maximum yearly contribution.
Dated this _____ day of ______, 201_____.
By: ______
NOTE: The above amendment is not permitted for a cafeteria (FSA) plan if the plan contains a provision authorizing a 2½ month expense grace period for payment or reimbursement of employee medical expenseimmediately following the end of the plan year.