Internal Revenue Service (IRS) Notice 2013-71 modifies the “use-it-or-lose-it” rule for health flexible spending accounts (health FSAs) set forth under Section 125 of the Internal Revenue Code. Under prior guidance, a Section 125 cafeteria plan generally could not provide for deferred compensation. As such, participants were generally prohibited from using contributions made during one plan year to reimburse expenses incurred in a subsequent plan year. Commonly referred to as the use-it-or-lose-it rule, this required that unused amounts be forfeited at the end of the plan year. In 2005, the IRS modified the use-it-or-lose-it rule by allowing plan sponsors to adopt a grace period. Under the grace period rule, a cafeteria plan may permit a participant to use amounts remaining from the previous year (including amounts from a health FSA) to reimburse expenses incurred for certain qualified benefits during a period of up to two months and 15 days immediately following the end of the plan year. The newest modification of the use-it-or-lose-it rule permits cafeteria plans to be amended to allow up to $500 of unused amounts remaining at the end of a plan year to reimburse qualified medical expenses incurred during the following plan year. However, the cafeteria plan may not also incorporate the grace period rule. For those plan sponsors choosing to include the $500 “carryover” rule, the cafeteria plan must be amended in writing on or before the last day of the plan year from which amounts may be carried over. The amendment may be effective retroactively to the first day of that plan year, provided that the cafeteria plan operates in accordance with the IRS guidance in the notice and informs participants of the carryover provision. The notice also provides that a cafeteria plan may be amended to adopt the carryover provision for a plan year that began in 2013 at any time on or before the last day of the plan year that begins in 2014. In light of this new guidance, plan sponsors should review their cafeteria plans and consider whether this carryover provision fits with their overall benefit strategy.