IRS modifies the “use-it-or-lose-it” rule for health flexible spending arrangements

On October 31, 2013, the IRS issued Notice 2013-71 allowing employers to modify their section 125 cafeteria plan documents to provide for the carry-over of up to $500 of any amount remaining unused at the end of a plan year in a participant’s health Flexible Spending Arrangement (FSA). This is permitted only if the employer does not also provide a grace period (allowing the use of amounts remaining in a health FSA from the previous plan year to pay qualified expenses incurred during the two and a half months immediately following the end of the plan year). Any unused amount in excess of the carry-over amount remains subject to the “Use-It-or-Lose-It” rule. Cafeteria plans can be amended now and provided the amendment is adopted by the end of the plan year from which amounts may be carried over, it will be effective as of the first day of the plan year.