United States: Modification of "Use It or Lose It" Rule for Health Flexible Spending Arrangements

The Internal Revenue Service recently issued new guidance modifying the "use it or lose it" rule applicable to health flexible spending arrangements (FSAs) to allow carryover of certain unused health FSA amounts into the next plan year.

On October 31, 2013, the Internal Revenue Service (IRS) issued Notice 2013-71, which modifies the existing requirement that unused amounts in a health flexible spending arrangement (FSA) at the end of a plan year (or applicable grace period) must be forfeited. This new guidance permits an employer to amend its cafeteria plan, effective as early as the 2013 plan year, to allow up to $500 of unused amounts as of the end of the plan year to be carried forward for use in the following plan year. The tradeoff is that a health FSA cannot have both a grace period and a carryover feature; it is one or the other.

Carryover of Certain Unused Amounts Permitted

The "use it or lose it" rule applicable to health FSAs requires unused amounts remaining in a health FSA at the end of a plan year (or applicable grace period) to be forfeited. The new guidance now permits an employer to amend its plan to allow for up to $500 of unused amounts remaining in a health FSA at the end of a plan year to be carried forward to reimburse eligible expenses incurred in the next following plan year. While the employer can elect to allow less than $500 to be carried over into the next following plan year, the same carryover limit must apply to all plan participants. This $500 permitted carryover feature does not affect the $2,500 annual health FSA limit imposed by the Affordable Care Act. Thus, a participant with $500 remaining unused in his or her health FSA at the end of a plan year may be permitted to carryover the $500 into the next plan year, in addition to a maximum contribution of $2,500, for a potential total of $3,000 available reimbursement that next following plan year.

Under prior IRS guidance, health FSAs are permitted to include a two-month and 15-day grace period after the end of the plan year, during which a health FSA participant can incur eligible expenses and use the amounts contributed for the previous year to pay those expenses. The new guidance specifies that a plan that is amended to provide for the carryover of unused health FSA amounts into the following plan year cannot also have a grace period in place for that following plan year. Thus, an employer amending its plan to allow for carryover of unused health FSA amounts may also need to amend the plan to remove any existing grace period feature.

Deadline for Plan Amendments Allowing Carryover

Under the new guidance, an employer electing to allow for carryover of unused health FSA amounts must amend its plan to permit the carryover. This amendment must be adopted on or before the last day of the plan year from which amounts can be carried over; for example, for a 2014 calendar-year plan year effective date, the amendment must be adopted on or before December 31, 2014. The amendment can be effective retroactively to the first day of that plan year, provided the change is communicated to participants. The guidance contains a special transition rule that permits an employer wishing to make this change for a plan year that begins in 2013 to amend its plan at any time on or before the last day of the plan year that begins in 2014. If an employer must also amend its plan to remove any existing grace period, the amendment must be adopted no later than the end of the plan year from which amounts may be carried over.

Calculation of Carryover Amount

If a plan is amended to allow for carryover of unused amounts in a health FSA for a plan year, the amount that is to be carried over for a participant is determined after all expenses have been reimbursed for that plan year after the end of the plan's run-out period. For example, if a plan has a run-out period that ends on March 31 of the following plan year, the amount carried over for a plan year is equal to the amount from that plan year remaining in the participant's health FSA after March 31 (up to the carryover amount elected by the employer, but no more than $500). Any unused amount in excess of $500 (or, if lower, the carryover amount elected by the employer) is forfeited.

Under the uniform coverage rule, the maximum amount of reimbursement from the health FSA must be available for claims incurred at all times during the period of coverage. For plans amended to allow the carryover of unused health FSA amounts from a plan year into the next plan year, the uniform coverage rule may cause amounts to be incurred and claims to be submitted for the next plan year before the carryover amount for the first plan year is determined. For instance, a participant in a health FSA with a run-out period ending March 31 that allows for carryover of $500 may have $400 remaining in his or her health FSA as of December 31, and elect $2,500 to be contributed to his or her health FSA for the next plan year. If the participant incurs expenses of $2,700 in January of the next plan year and submits those expenses for reimbursement on January 31, the plan can use $200 of the amount remaining as of December 31 to reimburse the participant in full. However, this reduces the potential carryover amount and amounts left for reimbursement during the remainder of the run-out period to $200. The guidance contains examples for these situations.

Health Savings Accounts, and FSA and Health Reimbursement Arrangement Interaction

Although the topic is not addressed in this recent guidance, individuals who are covered by traditional, general-purpose health FSAs or health reimbursement arrangements (HRAs) are not eligible for health savings account (HSA) contributions. A participant with a general-purpose health FSA that contains a grace period, and who has a year-end balance, is ineligible for HSA contributions until the first calendar month after the grace period ends (e.g., April 2014, in the case of a January 1, 2013, through March 15, 2014, plan year, including grace period). The same is true for the participant's spouse, if the spouse's medical expenses are eligible for reimbursement from the general-purpose health FSA. It is likely that IRS rules regarding eligibility for HSA contributions will apply to the new carryover feature as well. Thus, if a participant is covered under a general purpose health FSA with a carryover feature, and amounts are remaining in the health FSA at the end of the plan year, the individual will be ineligible to make HSA contributions for the following plan year during which he or she is eligible to access carryover amounts. Further guidance from the IRS on this issue would be welcome.

The impact of the new carryover rule on limited-purpose health FSAs and HRAs (limited to reimbursement for dental, vision and post-deductible expenses) was not addressed in the guidance. Under prior IRS guidance, individuals covered by limited-purpose health FSAs and HRAs are eligible to make HSA contributions. Thus, if it is permissible for an employer that sponsors a limited-purpose health FSA and/or HRA to adopt a carryover feature, presumably participants who have limited-purpose health FSAs and HRAs with such features should be eligible to make HSA contributions while covered under such arrangements.

Next Steps

Employers now have a choice whether to adopt a carryover feature, a grace period feature or a traditional health FSA with no such feature. This is a matter of plan design and not employee choice. Employers should decide whether to amend their plans to allow for the permitted carryover of unused health FSA amounts, and timely amend plan documents and communicate to participants as necessary. Employers offering health FSAs containing a grace period and electing to allow carryover of unused health FSA amounts should amend their plans to remove the grace period as necessary and communicate the change to participants. In addition, employers that offer high-deductible health plans (HDHPs) with HSA features will need to assess how adoption of a health FSA carryover feature affects an individual or employer's eligibility to make HSA contributions.

There are pros and cons for employers to consider in adopting the carryover feature and eliminating a grace-period feature. For example, participants with year-end balances greater than $500 may benefit from a grace period feature that contains no cap but has a shorter duration for incurring and submitting claims, while participants with year-end balances of $500 or less may benefit from having a longer duration to submit and incur claims. If an employer sponsors a HDHP with an HSA feature, consideration also must be given to how the grace period and carryover features affect an individual's eligibility to make and receive HSA contributions. It may also be impractical for an employer to remove a grace period feature for the 2013 or 2014 plan year that has already been communicated to employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions