Modification of “Use-it-or Lose it” Rule

Notice 2013-71 contains a modification of the “use-it-or-lose-it” rule applicable to flexible spending accounts.

Document Excerpt

 This notice contains modifications to the rules for § 125 cafeteria plans. First, sections II through V of the notice modify the “use-or-lose” rule for health FSAs that is currently set forth in proposed regulations under § 125 of the Internal Revenue Code (the Code). This modification permits § 125 cafeteria plans to be amended to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule. This carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the participant is permitted to make under §125(i) of the Code ($2,500 adjusted for inflation after 2012). This carryover option provides an alternative to the current grace period rule and administrative relief similar to that rule.

Second, section VI of this notice clarifies the scope of the transition relief provided in the preamble to proposed regulations under § 4980H that allows greater flexibility for individuals to make changes in salary reduction elections for accident and health plans provided through § 125 cafeteria plans for non-calendar cafeteria plan years beginning in 2013.

 

Link http://www.irs.gov/pub/irs-drop/n-13-71.pdf

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