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Employers who plan to implement a recent IRS rule change involving employee health flexible spending account plans should use caution in moving ahead with the change, according to some legal experts.
Under the change, announced in October, the Internal Revenue Service now permits employees to carry over up to $500 of unused funds in their FSA to the following plan year. The change is a marked departure from previous FSA rules which required employees to forfeit any unused balances at the end of each plan year, or at the end of a grace period of between two and five months.
The IRS has left it up to individual employers to decide if they want to implement the change or not. Employers are free to select a lower maximum carryover amount for their employees if they chose to do so. Employers interested in implementing the carryover change have until the end of the plan year to amend their plans
The decision to dilute the strict use-it-or-lose requirement is designed to encourage employee participation in FSAs. But companies need to evaluate all implications before rolling the change out to employers, according to Jones Walker LLP, a law firm specializing in employment issues. The IRS for instance, has not offered any guidance on how the carryover change will affect Health Savings Account eligibility. HSA rules basically prohibit individuals covered under a general purpose FSA, from contributing to an HSA. The IRS has similarly been silent on whether the revised FSA rules will impact HIPAA exception rules and COBRA eligibility.
Importantly, employers need to pay close attention to the potential cost implications of the IRS rule change. Many employers rely on annual FSA forfeitures to pay for the costs associated with administering the program and to cover losses caused by employees who overspent on their accounts. By giving employees a chance to carry over up to $500 each plan year, the amount available through forfeitures could reduce drastically. As a result, companies could end up increasing the cost of their FSA plans by letting employees carrying over unused amounts to the following plan year.
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