#1 – Modifying “Use it or Lose it”
Employers are permitted (not required) to amend plans that provide health FSAs to permit up to $500 of unused credits for a plan year to be carried over and applied toward expenses incurred at any time in the immediately following plan year. An employer may also limit the permitted carryover to an amount of less than $500. The “use it or lose it” rule would not be completely eliminated, because any unused credit in excess of $500 (after expiration of any “run-off” period) would still be forfeited.
This new carryover is an alternative to the current “grace period” rule. Plans may not provide for both the new carryover and the current grace period. The options are:
- Permitting a carryover of a limited amount (up to $500) that can be applied during the entire following year; or
- Permitting a potentially larger carryover that can only be applied against expenses incurred during a limited period (i.e., 2 ½ month “grace period”).
In order to adopt the new carryover, the written plan document must be amended. The amendment has to be adopted on or before the last day of the plan year from which the amounts will be carried over, but can be retroactive to the beginning of that year provided that the FSA is operated in accordance with the Notice and participants are notified of the new procedure.
This carryover has no effect on the $2,500 limitation on salary reduction for the year to which the amount is carried over. However, reimbursements for that year could total $3,000 (or more if the plan also provides non-elective credits). The entire amount is required to be available at any time during the plan year, under the uniform coverage rule.
#2 – Allowing Mid-Year Elections
This modification addresses the problem faced by participants in non-calendar-year plans who may need to modify their health plan elections effective January 1, 2014, as a result of the Affordable Care Act; but who will not be incurring a “change in status” that would allow such a modification to be made.
- If the individual had elected salary reduction to purchase health plan coverage, he or she is permitted to revoke or change that election once during the 2013-2014 plan year.
- If the individual had failed (or declined) to elect salary reduction to purchase health plan coverage, he or she can make a new election covering the remainder of the year.
Employers must amend their plan documents and have the option to provide more limited ability, such as allowing the elections to be made only during a limited time period.
This information has been provided from the Ford Harrison Legal Alert, dated Nov. 1, 2013. If you have questions regarding this information, please contact us at 239-433-5554. You may also visit our website at www.markham-norton.com.