By Jessica Webb-Ayer, JD, Legal Editor

The U.S. Department of the Treasury and the IRS recently issued Notice 2013-71, which modifies the “use-it-or-lose-it” rule for health FSAs. Under the “use-it-or-lose-it” rule, if an employee failed to use all contributions and benefits for a plan year before the end of the plan year (and the grace period, if applicable), those unused contributions and benefits were forfeited.

The updated guidance in Notice 2013-71 allows employers to permit plan participants to carry over up to $500 of their unused health FSA balances remaining at the end of a plan year. They may use the $500 at any time during the following year.

Employers are not required to add the carryover option, but if they decide to add it, they need to amend their plans in a timely manner and make sure they meet all the conditions for offering the carryover. Employers could also specify a lower carryover amount. They are not required to allow the full $500 carryover.

Additionally, an FSA plan cannot offer both the carryover option and a grace period option. It must be one or the other.”

Jessica Webb-Ayer, J.D., is an attorney editor for BLR’s human resources and employment law publications. She has written and edited countless publications on labor and employment law and is the editor of the Benefits Compliance Advisor online newsletter and the benefits manual, Benefits Compliance: Strategies for Plans, Programs & Policies. Ms. Webb-Ayer has also worked on various Americans with Disabilities Act (ADA) and workers’ compensation/safety products. She graduated summa cum laude with a B.A. in Psychology from Lipscomb University in Nashville, Tennessee, and graduated cum laude with a law degree from the University of Tennessee College of Law in Knoxville, Tennessee. Ms. Webb-Ayer is licensed to practice law in Tennessee.