When the IRS ended the controversial ban on carrying over flexible spending account (FSA) funds from year to year, the feeling among employers and employees was: It’s about time! But the IRS’ new rules have the potential to cause some confusion and make HR pros’ jobs even more difficult.
First, there’s the timing of the IRS announcement, which, as HR Benefits Alert reported previously,states that FSA account holders can now carry over up to $500 into the next plan year, effective for 2013 into 2014 and beyond. Because the feds’ announcement comes so close to the end of the year — and so many firms operate on a calendar year basis — that adjustments must be made quickly if employers choose to apply the FSA carryover option to leftover 2013 funds.
‘Grace period,’ administration and more
Here are some issues and confusion points caused by the feds’ new FSA rules:
The carryover essentially cancels out the “grace period.” Employers that want to let workers start carrying over FSA funds need to let account holders know they won’t be able to take advantage of the FSA grace period any longer. According to the feds, the $500 FSA carryover is an alternative to the grace period, and both options may not be offered during the same plan year.
The FSA carryover must be offered on a plan-wide basis. This is where things can get a little tricky. Because employers can either offer a carryover option or the FSA grace period, but not both, they need to decide which option will be best for their workers. And while it may seem obvious the carryover option is the best, it may not be that simple.
Reason: Under the grace-period option, there is no limit on the dollar amount of reimbursements in the two and a half months following the end of the plan year. On the other hand, workers can only get up to $500 with the carryover option. Depending on your workforce and its medical expenses, some employees may actually prefer the grace period.
The timing could cause administrative headaches. An employee’s carryover amount can’t be determined until the end of a “run-out period,” which is the time frame allowed for the submission of claims incurred during the plan year. Generally, this lasts about three months after the actual plan year is over. So, for calendar-year plans, account holders may not know their carryover amount until March 31 of the following plan year.
Plan docs must be amended. Another detail that can easily get overlooked is making changes to key plan documents. Generally, plans must make any changes to plan docs by the last day of the plan year from which FSA funds can be carried over. But the feds are offering an exception for this initial carryover year.
So, plans beginning in 2013 will have until the last day of 2014 to amend their plan docs — but they’ll still be able to carry over funds from 2013 into 2014. Still, it’s probably in employers’ best interests to amend plan docs sooner rather than later, as it’s easy to see how this task can be forgotten as other compliance challenges (e.g, Obamacare) come up throughout the year.
This post originally ran on our sister website, HRBenefitsAlert.com.