Notice 2013-71 - “Use-or-lose” rule changes for health FSAs, under section 125 cafeteria plans 

November 1: The IRS released an advance copy of Notice 2013-71 concerning changes to the rules for section 125 “cafeteria plans.”

Reason for notice

Flexible spending accounts (FSAs) are pre-tax accounts to pay for health costs such as co-pay and deductible amounts. FSAs are subject to a “use it or lose it” rule. Previously, the IRS added a “grace period” which is difficult to administer. Thus, the IRS issued this notice to provide an easier to administer rule.

Notice 2013-71

Notice 2013-71 [PDF 60 KB] specifically modifies the “use-or-lose” rule for health flexible spending accounts (FSAs) and allow section 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.

The carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the participant is permitted to make under section 125(i) (i.e., $2,500 adjusted for inflation after 2012). The carryover option provides an alternative to the current grace period rule and administrative relief similar to that rule.

A cafeteria plan offering a health FSA and intending to use the new carryover option must be amended to set forth the carryover provision. The IRS notice includes examples illustrating this point.

Notice 2013-71 also clarifies the scope of the transition relief provided in the preamble to proposed regulations under section 4980H that allows greater flexibility for individuals to make changes in salary reduction elections for accident and health plans provided through section 125 cafeteria plans for non-calendar cafeteria plan years beginning in 2013.

Lastly, Notice 2013-71 states that Treasury and the IRS intend to amend Prop. Reg. sections 1.125-1(o) and 1.125-5(c) to reflect this guidance, and that taxpayers may rely on Notice 2013-71 until the amended regulations are issued and are effective.

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