FSA Rollover…An Early Christmas Present From the IRS!

When people hear or see the acronym – IRS – they generally do not associate it with gift giving.  But that is precisely what the IRS delivered on October 31, 2013 in the form of Notice 2013–71, which allows for a partial carryover of unused FSA funds (click - http://www.irs.gov/pub/irs-drop/n-13-71.pdf). The often cited “use it or lose it” rule deters many otherwise eligible Flexible Spending Account (FSA) enrollees from setting aside funds on a pre-tax basis for future use.  However, with the issuance of Notice 2013-71, the IRS is allowing the option of a rollover of up to $500 at the end of the FSA plan year…even for 2013 plan years!  This is great news for FSA plan participants and employers alike.

Back in 2005, the IRS issued a similar relaxation of the code, which allowed for a 2.5 month grace period in which plan participants could continue to incur FSA reimbursable expenses (see IRS Notice 2005-42; click - http://www.irs.gov/pub/irs-drop/n-05-42.pdf ).

Since plan participants still faced the prospect of forfeiting unused balances at the conclusion of the grace period, this provision seemingly had little impact on increasing FSA plan participation.  The allowance of up to a $500 rollover, if effectively communicated, should have the effect of increasing FSA plan participation, thus saving eligible individuals, and their employers, valuable tax dollars. (Note: according to a recent CNN Money article, approximately 14 million families participate in FSAs.)

Here is a summary of the IRS notice, and some things for employers and plan participants alike to keep in mind:

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