General Information

Federal Guidance (IRS Notice 2013-71) issued on October 31, 2013, will now allow employees to carryover up to $500 of unused amounts from one year to the next. Prior to this guidance, under the “use-or-lose” rule, amounts remaining in an employee’s health FSA account at the end of the plan year would be forfeited, unless the plan allowed for a grace period. Under this guidance, employers will have the option to change their health FSA to allow an employee to carryover over up to $500 of their remaining balance to the immediate subsequent plan year and have it available to use for the entire plan year. This carryover is only allowed on health FSAs and does not apply to any other benefit under a flexible spending arrangement.

Will this amount affect the maximum salary reduction an employee can contribute?

No. The carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the employee is permitted to make.

Can a plan also have a grace period in addition to the carryover?

No. A plan is not permitted to have both the carryover provision and a grace period under the health FSA plan. However, a grace period under a dependent care FSA will still be allowed. (Under the grace period rule, a cafeteria plan may permit an employee to use amounts remaining from the previous year (including amounts remaining in a health FSA) to pay expenses incurred for certain qualified benefits during the period of up to two months and 15 days immediately following the end of the plan year.)

Is a plan amendment required and when is this effective?

Yes. An amendment must be adopted by the last day of the plan year from which amounts may carryover and may be effective retroactively to the first day of that plan year, provided that the plan informs participants of the carryover over provision. Effective immediately, for calendar year plan, employers that offer a health FSA will have the option of allowing workers to carryover up to $500 of unused funds at the end of the 2013 plan year. Effective in plan year 2014, employers that offer a health FSA will have the option of allowing participants to carryover up to $500 of unused funds at the end of the plan year. A plan may be amended to adopt the carryover over 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 plans that have a grace period, the amendment to include the carryover provision will also need to include the removal of the grace period under the health FSA plan.

What are the pros and cons for the Employer?

The uniform coverage rule requires that the maximum amount of reimbursement from the health FSA (including both salary reduction amounts and any non-elective employer flex credits) be available for claims incurred at all times during the period of coverage (properly reduced as of any particular time for prior reimbursements for the same period of coverage).  This rule will continue to apply to plans adopting the carryover of up to $500. This means that an employee that elects to contribute $2,500 in a new plan year and then carries over $500 from the preceding year, the plan will be required to make the full $3,000 available at the beginning of the new plan year.

In addition, unused amounts, under $500, remaining in employee accounts at the end of the plan year will no longer be forfeited and credited back to the employer. Clarification is still needed, but employees may have the ability to use the carryover amount until the amount is gone or they terminate employment even if they don’t elect to participant in a health FSA in subsequent years.

What are the pros and cons for the Employee?

Employees will now be allowed to carryover unused amounts, up to $500, into the immediate subsequent plan year. Employees will also have the ability to use their carryover amount for the entire plan year (unlike a grace period). However, if an employee has unused amounts that exceed $500, only $500 will be carried over and anything above this limit will be forfeited.

How Can I Get More Information?

If RCI is your current FSA administrator, you may contact your Account Manager or the Flex Department at (308) 635-2260 or toll free at (800) 795-7772). You can also email our Flex Department at