SECOND OPINIONS: Carryovers of Unused Health FSA Balances

December 4, 2013 ( - On October 31, the IRS and Treasury issued Notice 2013-71 which permits employers to allow employees to carry over up to $500 of unused health flexible spending account (FSA) balances to the next plan year.

The Notice modifies the longstanding “use it or lose it” rule that has been intended to help enforce the requirement under Code section 125 that a cafeteria plan not provide for the deferral of compensation.  The Notice follows on the heels of a provision in the Affordable Care Act that limits the amount of salary reduction elections to a health FSA to $2,500 per taxable year effective for cafeteria plan years beginning after December 31, 2012.

Below are responses to questions we have received from employers regarding the Notice and the new carryover option.

What are the general carryover rules in the Notice? 

The Notice permits employers to allow an employee to carry over to the next plan year up to $500 of any unused amounts remaining in the employee’s health FSA at the end of the plan’s “run-out period” for the plan year.  Importantly, the carryover does not reduce the permitted $2,500 salary reduction election limit in the next plan year, and thus an employee with a carryover may still choose salary reduction elections for the next plan year of up to $2,500 (or another lower limit provided for in the plan).  If the employer decides to allow a carryover, the same carryover limit must apply to all participants.  

When do the new carryover rules become effective? 

The Notice permits employers to adopt the carryover provision as early as the current 2013 plan year.

Can a plan that includes a health FSA carryover option also include a grace period? 

No.  Since 2005, plans had been able to provide for a grace period of up to two months and 15 days following the end of the plan year in which participants could continue to incur expenses and receive reimbursements for those expenses from the unused amounts in the health FSA at the end of the plan year.  Under the Notice, a plan that adopts the carryover provision may not also provide a grace period for the FSA.  Thus, an FSA may either provide for the carryover or provide for an up to 2-1/2 month grace period, but not both. 

What is the deadline for an employer to amend its cafeteria plan to include an FSA carryover?

In general, an employer has until the last day of the plan year from which amounts may be carried over to amend its cafeteria plan to adopt the new carryover option, and the amendment may be retroactive to the first day of that plan year.  An employer also must inform participants of the carryover provision.

The Notice provides a special rule for the 2013 plan under which an employer may amend its cafeteria plan to adopt the carryover provision for a plan year that begins in 2013 at any time on or before the last day of the plan year that begins in 2014.  For a calendar year plan, this means that an employer generally could amend its cafeteria plan as late as December 31, 2014 to adopt a carryover from the 2013 plan year to the 2014 plan year.

However, an employer adopting a carryover must also amend its cafeteria plan to remove the grace period no later than the end of the plan year from which amounts may be carried over.  

This means that an employer with a calendar year cafeteria plan that provides a grace period that wishes to adopt the carryover for the 2013 plan year would need to amend its cafeteria plan before the end of the 2013 plan year to eliminate the grace period and provide for the carryover.

Removing the grace period could raise issues for employers that want to adopt the carryover for the 2013 plan year because many employees rely on the extra 2 ½ months to incur expenses.  Thus, employers will need to weigh the benefits of the carryover against the benefits of the grace period – e.g., employees may prefer the carryover to having to spend remaining FSA amounts during the grace period.  And, as noted by the Notice, there could be other non-Code legal restraints (e.g., ERISA or contractual issues) that could limit an employer’s ability to eliminate a grace period for the current plan year.  Thus, many employers with plans that currently provide for a grace period may choose to wait until the 2014 plan year to make changes.

Could making a health FSA carryover affect an employee’s HSA eligibility for the next plan year? 

Yes, it appears so. 

Generally, an individual who is covered by a general purpose FSA may not make contributions to a health saving account (HSA).  However, an individual may be covered under certain types of FSAs, such as a limited purpose FSA that pays or reimburses expenses only for preventive care or certain other “permitted coverage,” or a post-deductible FSA that pays or reimburses permitted medical expenses only if incurred after the minimum annual deductible for the high deductible health plan has been satisfied.

The Notice did not address how an FSA rollover would impact eligibility for an HSA or the extent to which a plan can be amended to address HSA eligibility issues related to FSA carryovers.  Nevertheless, it may be possible for an employer to amend its cafeteria plan to provide that amounts remaining in participants’ FSAs who want to participate in the employer’s HSA program the next year may be carried over to a limited-purpose or post-deductible FSA.  In addition, it appears that a plan could provide that a participant who wants to be HSA-eligible in the following year could opt out of the FSA carryover.


Christy Tinnes is a Principal in the Health & Welfare Group of Groom Law Group in Washington, D.C.  She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare.  She represents employers designing health plans as well as insurers designing new products.  Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.

Brigen Winters is a Principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.