The IRS recently issued guidance providing limited relief to the “use it or lose it” rule.  Under the new guidance, employers may amend their cafeteria plan to permit participants to carryover up to $500 of unused contributions in their health flexible spending account (but not dependent care flexible spending accounts) into the next plan year. The amounts carried over may be used to reimburse plan participants for qualified medical expenses incurred at any time during the following plan year.  The carryover does not affect the amount a participant can elect for the next plan year, so effectively up to $3,000 can be available.

A health flexible spending account may not have both a carryover and a grace period (under which participants may use prior year dollars to reimburse expenses incurred during the first 2-1/2 months of the current year).  Employers that currently use the grace period may eliminate the grace period for the 2013 plan year, allowing up to $500 of unused contributions to be carried over for use in the entire 2014 plan year.  However, before doing so, employers will want to carefully consider the impact this will have on employees.  The grace period may be more beneficial for some employees (for example, employees with more than $500 left over at the end of the year may spend more than $500 in the first 2-/2 months of the following year). 

Employers may adopt this new rule for the 2013 plan year.  Adding the carryover requires an amendment by the end of the year from which amounts may be carried over, but there is an extension for 2013, under which the amendment deadline is the last day of the plan year beginning in 2014. However, if the plan has a grace period, the grace period must be eliminated by the end of the plan year from which amounts may be carried over, with no extension for 2013. Thus, a plan with a grace period that wants to change to the carryover for 2013 account balances will have to act by the end of this year. 

Another cafeteria plan amendment to consider involves the change in election rules.  In 2014, individuals may purchase coverage through a State Marketplace (also known as an Exchange).  The availability of health plan coverage through the Marketplace is not currently considered a change in status event that would permit an employee to change his or her election under an employer's cafeteria plan.  Under new guidance, an employer that sponsors a non-calendar year cafeteria plan may amend its cafeteria plan to allow employees to change a cafeteria plan election in either or both of the following events:

• An employee who elected to reduce salary through a cafeteria plan for health coverage with a non-calendar plan year beginning in 2013 is allowed to prospectively revoke or change an election with respect to the health plan once during the plan year; and

• An employee who failed to make a salary reduction election through the employer's non-calendar year cafeteria plan beginning in 2013 is allowed to make a prospective salary reduction election for health coverage on or after the first day of the 2013 plan year.