A Refresher on FSA Carryovers

A health flexible spending account (FSA) is an employer-sponsored account that employees can use to pay for or reimburse their qualifying medical expenses on a tax-free basis, up to the amount contributed for the plan year. Health FSAs are subject to a “use-or-lose” rule that generally requires any unused funds at the end of the plan year (plus any applicable grace period) to be forfeited.

The Internal Revenue Service (IRS) relaxed the “use-or-lose” rule for health FSAs in Notice 2013-71 (Notice). Under the relaxed rule, employers may allow participants to carry over up to $500 in unused funds into the next year. Any unused amount in excess of $500 (or a lower amount specified in the plan) remaining at the end of the plan’s run-out period for the plan year must be forfeited.

The carryover of up to $500 may be used to pay or reimburse medical expenses under the health FSA incurred during the entire plan year to which it is carried over. Also, the carryover amount does not count toward the Affordable Care Act’s (ACA) limit on employees’ salary reduction contributions to a health FSA.

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About the Author:Mary Frank

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