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.