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News Flash November 1 2013 Two Developments Plans May Permit Participants to Roll Over $500 in unused Health FSA Further Clarification Transition

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  • 1. News Flash: November 1, 2013 – Two Developments – Plans May Permit Participants to Roll Over $500 in unused Health FSA Funds to the Next Plan Year; Further Clarification Concerning the Transition Rule Permitting Employees in a Non-Calendar-Year Plan to Make Limited Election Changes Without a Change In Status Event First Development: The Department of Treasury and the Internal Revenue Service issued a notice yesterday that makes a significant difference to the administration of health flexible spending accounts (“FSA”). For almost three decades, employees choosing to participate in a health FSA faced the prospect of forfeiting any unused balances at the end of the year. However, in response to significant feedback from interested parties citing the difficulty of predicting upcoming medical expenses and the desire to avoid encouraging employees to incur frivolous/unnecessary medical charges at the end of the year, employers will now have more freedom in their FSA plan design and administration. Background Under Internal Revenue Code Section 125 (also referred to as a “cafeteria plan”), employers may allow employees to make pre-tax contributions toward the cost of their benefits. FSA benefits are included within the list of the benefits that can be paid for with pre-tax dollars. FSAs have been limited by the cafeteria plan rules that prohibit enrollees from using contributions in one year in order to purchase benefits that will be provided in the following year to avoid any deferral of income and tax. In 2005 the Treasury Department relaxed the use-or-lose rule and adopted a rule providing for a 2 ½ month grace period during which qualified medical expenses could be incurred, but paid from the prior year’s balance. In 2013, as part of the Patient Protection and Affordable Care Act (“PPACA”), health FSA elections were limited to $2,500. New Guidance Notice 2013-71 allows plan sponsors an administrative option so that enrolled employees may carry over up to $500 from any unused health FSA balance to the following year. This is different from the plan’s ability to pay claims from the prior year through the run-out process after the close of the plan year (which many plans permit), since under a run-out process, qualifying prior-year health FSA claims are paid from FSA funds collected in the prior year. Under the new guidance, the health FSA money carried over to the next year may be used only for claims incurred within the new plan year. Plan sponsors are not required to permit the carryover (although we suspect most will), and they may elect to continue the use-or-lose FSA administration. This will undoubtedly be good news for your employees and will allow them to protect a significant portion of their health FSA contributions. Perhaps that additional flexibility will encourage more employees to sign up for the FSA. However, there is an important caveat regarding the new carryover option. If a plan sponsor has incorporated a grace period into its FSA plan design, it will not be permitted to add the FSA carryover to its plan design. Those sponsors will have to make a determination whether to keep the grace period or change that to the carryover plan design. They will not be able to have both features in their plans. Employers that elect to incorporate the FSA carryover must generally amend their cafeteria plan documents before the end of the plan year in which they would like to permit carryover. However, the notice outlines a special provision for plan amendments affecting a carryover from an unused 2013 FSA balance. If an employer desires to permit a carryover from 2013 to 2014, the cafeteria plan may be amended at any time on/before the last day of the plan year that begins in 2014. So, for a calendar year plan, the amendment must be adopted no later than December 31, 2014.
  • 2. Second Development: The Department of Revenue and the Internal Revenue Service also issued guidance within Notice 2013-71 regarding the ability of individuals to change their cafeteria plan elections in order to choose coverage under the Health Care Marketplace. Background Generally benefit elections made through a cafeteria plan are made in advance of the cafeteria plan year and are 12month elections which are irrevocable during the year unless there is a change in status event. The opportunity to elect coverage through the Health Care Marketplace does not, however, constitute a change in status event which would allow an employee to change his/her cafeteria plan election. Therefore, without special accommodation, employees participating in a non-calendar-year cafeteria plan would not be able to change their cafeteria elections and join the Health Care Marketplace beginning in 2014. Previously the Treasury Department and the Internal Revenue Service created a transition rule that applies to individuals participating in a non-calendar year cafeteria plan that starts in 2013 to make a one-time change in their elections to either add coverage under the employer plan or drop the employer coverage in order to take the coverage in the Marketplace. In order to allow Health Care Marketplace enrollment, employers may amend their cafeteria plans in order to allow employees to make prospective pre-tax elections. Clarification Notice 2013-71 clarifies that the ability of a plan to implement this transition relief does not depend upon the employer’s status as a “large plan” under the Pay or Play mandate. Therefore, all plan sponsors of non-calendar-year cafeteria plans may allow their employees to make prospective changes to their cafeteria plan elections. Additionally, the notice indicated that the plan sponsor may be more restrictive in offering an election change opportunity when a participant is enrolled in a non-calendar-year plan. For instance, an employer may impose a time limit during which prospective election changes may be made under the cafeteria plan Conclusion NLRG is analyzing the notice and its effects and will provide additional information in a future publication. The information in this publication is not intended as legal or tax advice and has been prepared solely for informational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.

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