There has been a major modification to the “use it or lose it” rule, which required any leftover balance in an FSA to be forfeited at the end of the plan year. Effective in plan year 2014, employers that offer FSAs will HAVE THE OPTION of allowing participants to roll over up to $500 of unused funds at the end of the plan year. If your plan currently includes a grace period (the ability to incur expenses for an additional 75 days after the end of the plan year), you can elect whether to maintain the grace period or eliminate the grace period and institute the rollover provision. You can have one or the other, but not both.
This should be a beneficial change, resulting in increased participation and the resulting tax savings for employees and employers alike. The “use it or lose it” rule has been one of the most commonly cited reasons why employees chose not to participate in Flexible Spending Accounts.
There is one other important update regarding flexible spending accounts from the Treasury Department. In order to meet HIPAA excepted benefit rules in compliance with the Affordable Care Act Requirements, only individuals eligible for employer provided medical coverage can be offered participation in the health FSA. E.g. part time employees not eligible for medical benefits are not eligible to enroll in the FSA.
If you are interested in amending your plan to include the rollover provision, please let us know. If you have any questions, please contact us.