The IRS has added a new option to health flexible spending accounts (FSAs) offered under Section 125 cafeteria plans. Participants who contribute to their health FSA can now “carry over” up to $500 of unused amounts remaining in their FSAs at the end of the year. The prior rule required that all unused amounts in a health FSA be forfeited at the end of the plan year.
This new option is an alternative to the grace period rule. The carry over feature is not permitted for FSAs that allow a grace period during which a participant can use amounts contributed in a prior year toward expenses incurred in the first two and a half months of the subsequent year.
The plan must still forfeit any amounts in the health FSA that exceed $500 at the end of the plan year, and amounts in the FSA at termination of employment (unless the participant elects COBRA).
The cafeteria plan document must be amended to reflect the carry over provision, and employers can provide for a lower carry over amount (the $500 limit is a maximum).
The IRS guidance is available here.