United States: Health FSA Carryover Amendments - Proceed With Caution

Recently the Internal Revenue Service published guidance that permits an employer to amend its health care flexible spending account program (HFSA) to allow a limited carryover of funds. In IRS Notice 2013-71, the IRS provides for a new exception to the "use it or lose it" requirements by allowing an employer to permit up to $500 in unused HFSA amounts from one year to be used for claims incurred in the next year. However, as with many tax-favored benefits, employers should carefully consider the requirements and potential consequences before implementing the change in their HFSA.

Background

HFSAs generally permit employees to elect to reduce their pay before tax and have the money available during the plan year to pay for qualifying medical expenses. In the past, the IRS has been concerned about these elections being used to defer income from one year to the next. As such, the HFSA rules initially provided that amounts set aside and not used during the year by the participant would be lost, a rule commonly referred to as "use it or lose it." This rule appeared to have a chilling effect on many workers who were concerned about the possible loss of money, and therefore did not participate in the HFSA. Even among those who chose to participate in the HFSA, there was often a year-end run for possibly unnecessary medical items to avoid loss of funds. We have even heard stories about eyeglasses being bought at the end of December and returned for cash in January.

The IRS tried to address these concerns in 2005 by allowing employers to adopt a grace period under both their HFSA and their dependent care flexible spending account programs. Under this 2-1/2-month long grace period, employers could amend their plans to allow employees to use prior year dollars for claims incurred during the grace period. There was no dollar limit on the amount from the prior year that could be spent on qualifying items during the grace period.

Notice 2013-71

In Notice 2013-71, the IRS has provided a different alternative to "use it or lose it." An employer can decide to amend its HFSA (starting as early as the 2013 plan year) to permit the carryover of up to $500 from one year to the next. In allowing this carryover, the IRS has stated that it is less concerned about the potential to defer income from one year to the next given the Affordable Care Act's $2,500 (as indexed) dollar limit on HFSAs. It further provided that the carryover amount will not count against the next year's $2,500 (as indexed) maximum HFSA amount.

The Notice sets forth other requirements and information around implementation of the HFSA carryover. It provides that an employer cannot offer both an HFSA grace period and an HFSA carryover for the same year. As such, if an HFSA currently provides for a grace period, it must be amended out for any year in which the HFSA is amended to permit a carryover. If an employer elects to allow the carryover for 2013, there is a special rule that permits the amendment reflecting the carryover to be adopted by the end of the 2014 plan year. Otherwise, the amendment adding the carryover needs to be adopted by the last day of the plan year in which the carryover is permitted. However, a grace period provision in an HFSA must be removed from the HFSA by the end of the year from which the amounts may be carried over. Accordingly, for a calendar year plan, any grace period provision must be amended out by December 31, 2013 if the employer wants to allow a carryover of 2013 amounts.

The Notice also addresses the coordination of run-out claims (which usually occurs during the beginning of the following plan year), and carryover amounts. It provides that, to make administration easier, the HFSA can treat reimbursement of current year claims as being taken from new plan year money first, and then carryover money. This allows for carryover eligible amounts to be determined after any applicable prior year claims have been factored into the determination.

Employer Implementation Considerations

While the idea of allowing a carryover of unused amounts up to $500 seems to be a good one, employers need to consider the benefits, concerns and unknowns before making a decision for 2013 and beyond.

On the positive side, implementing a carryover may encourage better participation by employees. However, that positive impact will not be felt for 2013, since those elections are long past. After 2013, however, greater participation may mean FICA savings for employers (as contributions generally are exempt from FICA taxation). Employers may also feel that having the carryover ability is a positive from an employee relations perspective.

On the negative side, if an employer currently has a plan with a grace period, and an employee has counted on that for a big ticket item in 2014, taking away that grace period and implementing a carryover for 2013 will deny that employee access to the full 2013 account during the 2-1/2-month grace period.

The guidance also does not specify how COBRA continuation coverage will work in terms of a carryover for the HFSA. Questions include how to determine premium amounts and whether this will affect the special shorter COBRA period currently enjoyed by HFSAs.

The guidance is also silent on coordinating the carryovers with health savings account (HSA) eligibility. Can a small balance of $1.50 that gets rolled over affect eligibility in the HSA? Or will there be an exception similar to that applied to employees who have funds available during a grace period if all amounts are rolled to a limited purpose HSA?

The guidance addresses only HFSAs, not dependent care spending accounts. Is it possible for there to be a dependent care grace period and an HFSA carryover? It will likely mean even more confusing enrollment materials!

Employers should also consider potential costs and administrative issues related to implementing a carryover. If a participant has a small balance remaining and chooses not to participate for the 2014 plan year, the employer may be subject to an administrative charge that is greater than the small carryover amount. As well, before rolling out the program, the employer may wish to be certain the administrator has the tools to be able to coordinate run-out with new and old money.

Finally, it should be noted that many employers use the "lose it" amounts to help defray the administrative costs for the plan. Such employers should take into account that with the new carryover provisions there may be less available from "lost" funds.

In sum, the carryover is a welcome tool, but employers may be well served to consider the issues and wait for additional guidance before implementing it in the HFSA.

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.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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