Medical flexible spending accounts (also known as flex accounts or FSA's) allow employees to fund medical expenses on a pre-tax basis, up to $2,500 annually.  Employee elections to make medical flex contributions are generally irrevocable during the plan year and the flex account must be forfeited to the extent not used for medical expenses during the plan year. In recent years, IRS allowed plans to add a "grace period," to allow reimbursement of employee expenses incurred in the 2½ months after the end of a plan year. Now, IRS is allowing employers to choose between the grace period and allowing a $500 carry forward of unused flex dollars for use anytime during the next plan year. Under the new rules:

  • Employers may choose to amend their plans to allow a carry forward of up to $500 in unused flex dollars effective for flex contributions made in the 2013 or a later plan year. 
  • The carry forward plus a new $2,500 contribution means employees could have a $3,000 flex account for a plan year.
  • The maximum that can be carried forward is $500, unlike the shorter grace period, which has no limit on carryover dollars.
  • The 2½ month grace period cannot be allowed for the same plan year in which a $500 carry forward is allowed.
  • IRS has set a December 31, 2014 deadline for adopting a plan amendment to document the $500 carry forward for the 2013 plan year, or by the last day of the plan year if adopted for 2014 or a later plan years. However, if the plan has a 2½ month grace period, a plan amendment should be signed before the plan year begins to remove that grace period to avoid employee claims. 

Adding a carry forward will encourage employees to participate and reduce the worry about forfeiting unused dollars. This could be very helpful for employers having trouble passing nondiscrimination testing for 125 plans. If adding this provision encourages greater use of the plan, employers FICA taxes are reduced. But, the $500 carry forward could also increase the number of small accounts and increase administrative fees. Employers should also evaluate these aspects of moving to the new rules:

  • If a carry forward is to be allowed for 2014, employees should be told now since that may change their decision on how much to contribute for 2014. If the plan has a grace period and it is being removed for 2014, employees must be told before the deadline for their 2014 medical flex elections.
  • Employers should be cautious about removing a 2½ month grace period already in their plan for 2013 and replacing it with the $500 carry forward, as doing so may frustrate employees who had a specific use for a larger balance to be used in the grace period.  
  • If an employer has a high deductible insurance option with a health savings account (HSA), the carry forward would make employees ineligible to maintain an HSA in a later plan year even if the employee doesn't elect any medical flex contributions for that later plan year. Plan sponsors may want to address this by amending their plan to include a limited flex option that would automatically apply to those with an HSA.   Under limited flex, only expenses incurred after the health plan deductible is met, preventative care and dental and vision care can be reimbursed. Alternatively, employees can be allowed to opt out of medical flex participation in a carry forward year.
  • The 2½ month grace period added complexity to plan administration and the carry forward is also complex. Employees typically may submit expenses incurred in a plan year for reimbursement for up to 90 days after the end of the plan year. Expenses incurred during the grace period may need to be reimbursed first from the current year flex account because employees could still submit reimbursement for prior year expenses that would use up any prior year account and reduce or eliminate any carry forward. 
  • The application of COBRA is also impacted. The IRS notice said the carry forward coverage ends at termination of employment unless COBRA is elected, so COBRA will need to be offered to those with a carry foward account. 
  • To limit adminstrative cost for employees who no longer make medical flex contributions, the carry forward should be limited to one year. This type of restriction may need to be in place from the date a carry forward is adopted, because carry forward limitations must be the same for all participants. 
  • Some employees may prefer the grace period to the $500 carry forward. With the grace period, an employee needing $5,000 of dental work, for example, could elect $2,500 for 2014 and for 2015, and then have $5,000 available for expenses incurred in the first quarter of 2015. Employers must choose whether to allow a grace period, carry forward, or neither. Employees cannot be given a choice.

There are lots of considerations in adding a $500 carry forward to an employer's medical flexible spending account plan. Frost Brown Todd's Employee Benefits team is ready to assist you with amendments or evaluating plan changes. 

Medical flexible spending accounts (also known as flex accounts or FSA's) allow employees to fund medical expenses on a pre-tax basis, up to $2,500 annually.  Employee elections to make medical flex contributions are generally irrevocable during the plan year and the flex account must be forfeited to the extent not used for medical expenses during the plan year. In recent years, IRS allowed plans to add a "grace period," to allow reimbursement of employee expenses incurred in the 2½ months after the end of a plan year. Now, IRS is allowing employers to choose between the grace period and allowing a $500 carry forward of unused flex dollars for use anytime during the next plan year. Under the new rules:

  • Employers may choose to amend their plans to allow a carry forward of up to $500 in unused flex dollars effective for flex contributions made in the 2013 or a later plan year. 
  • The carry forward plus a new $2,500 contribution means employees could have a $3,000 flex account for a plan year.
  • The maximum that can be carried forward is $500, unlike the shorter grace period, which has no limit on carryover dollars.
  • The 2½ month grace period cannot be allowed for the same plan year in which a $500 carry forward is allowed.
  • IRS has set a December 31, 2014 deadline for adopting a plan amendment to document the $500 carry forward for the 2013 plan year, or by the last day of the plan year if adopted for 2014 or a later plan years. However, if the plan has a 2½ month grace period, a plan amendment should be signed before the plan year begins to remove that grace period to avoid employee claims. 

Adding a carry forward will encourage employees to participate and reduce the worry about forfeiting unused dollars. This could be very helpful for employers having trouble passing nondiscrimination testing for 125 plans. If adding this provision encourages greater use of the plan, employers FICA taxes are reduced. But, the $500 carry forward could also increase the number of small accounts and increase administrative fees. Employers should also evaluate these aspects of moving to the new rules:

  • If a carry forward is to be allowed for 2014, employees should be told now since that may change their decision on how much to contribute for 2014. If the plan has a grace period and it is being removed for 2014, employees must be told before the deadline for their 2014 medical flex elections.
  • Employers should be cautious about removing a 2½ month grace period already in their plan for 2013 and replacing it with the $500 carry forward, as doing so may frustrate employees who had a specific use for a larger balance to be used in the grace period.  
  • If an employer has a high deductible insurance option with a health savings account (HSA), the carry forward would make employees ineligible to maintain an HSA in a later plan year even if the employee doesn't elect any medical flex contributions for that later plan year. Plan sponsors may want to address this by amending their plan to include a limited flex option that would automatically apply to those with an HSA.   Under limited flex, only expenses incurred after the health plan deductible is met, preventative care and dental and vision care can be reimbursed. Alternatively, employees can be allowed to opt out of medical flex participation in a carry forward year.
  • The 2½ month grace period added complexity to plan administration and the carry forward is also complex. Employees typically may submit expenses incurred in a plan year for reimbursement for up to 90 days after the end of the plan year. Expenses incurred during the grace period may need to be reimbursed first from the current year flex account because employees could still submit reimbursement for prior year expenses that would use up any prior year account and reduce or eliminate any carry forward. 
  • The application of COBRA is also impacted. The IRS notice said the carry forward coverage ends at termination of employment unless COBRA is elected, so COBRA will need to be offered to those with a carry foward account. 
  • To limit adminstrative cost for employees who no longer make medical flex contributions, the carry forward should be limited to one year. This type of restriction may need to be in place from the date a carry forward is adopted, because carry forward limitations must be the same for all participants. 
  • Some employees may prefer the grace period to the $500 carry forward. With the grace period, an employee needing $5,000 of dental work, for example, could elect $2,500 for 2014 and for 2015, and then have $5,000 available for expenses incurred in the first quarter of 2015. Employers must choose whether to allow a grace period, carry forward, or neither. Employees cannot be given a choice.

There are lots of considerations in adding a $500 carry forward to an employer's medical flexible spending account plan. Frost Brown Todd's Employee Benefits team is ready to assist you with amendments or evaluating plan changes.