Changes to “Use-or-Lose” Rule for Health FSAs

According to new agency guidance, employers may now allow employees to carryover up to $500 of unused amounts in a health flexible spending arrangement (FSA) to use in the following plan year.

Use-or-Lose
The “use-or-lose” rule requires that amounts in an employee’s health FSA that are not spent by the end of a plan year be forfeited. However, an employer’s cafeteria plan can provide for a grace period, whereby an employee is permitted to use amounts remaining from the previous year to pay expenses incurred for certain qualified benefits during the period of up to 2 1/2 months immediately following the end of the plan year.

New Guidance Details Changes
The agency guidance explains that an employer may, at its option, amend its cafeteria plan document to provide for a carryover to the immediately following plan year of up to $500 of any amount remaining unused as of the end of the plan year in a health FSA. The carryover may be used to pay or reimburse medical expenses under the health FSA incurred during the entire plan year to which it is carried over.

The carryover of up to $500 does not count against or otherwise affect the indexed $2,500 salary reduction limit applicable to each plan year. A cafeteria plan that incorporates the carryover provision may not also provide for a grace period in the plan year to which unused amounts may be carried over.

An employer may adopt this carryover provision to health FSAs for the current cafeteria plan year and/or subsequent plan years by amending the plan document in the manner and within the time frames described in the agency guidance.

New model notices are available to help health plans comply with the Health Insurance Portability and Accountability Act (HIPAA) Privacy Rule. The Privacy Rule generally requires covered entities, including health plans, to develop and distribute a notice informing individuals of the entity’s privacy practices and of the individual’s privacy rights with respect to his or her personal health information (PHI).

Note: Group health plans providing benefits only through one or more contracts of insurance with issuers or HMOs, and that do not create or receive PHI–other than summary health information or enrollment information–are not required to develop this notice.

The model notices reflect changes made by the HIPAA final omnibus rule that became effective in March. Covered entities were required to revise their notices to reflect those changes by September 23, 2013, and must redistribute the notice as provided in the final omnibus rule. You can visit our HIPAA section for more information.

A new set of Q&As provides additional guidance regarding how the prohibition on annual dollar limits and the requirement to cover preventive services under Health Care Reform apply to health reimbursement arrangements (HRAs) and certain other employer healthcare arrangements. The following are key highlights that may be of interest to employers:

• A group health plan, including an HRA and an employer      payment plan, cannot be integrated with individual market coverage.
  • An HRA or employer payment plan used to purchase       coverage on the individual market will therefore fail to comply       with the annual dollar limit prohibition and the preventive services       requirements.
• An HRA that is integrated with a group health plan      will generally comply with the annual dollar limit and preventive services      requirements if the group health plan with which the HRA is integrated      complies with those requirements.
  • An HRA will be integrated with a group health plan for       purposes of the annual dollar limit prohibition and the preventive       services requirements if it qualifies under either of two integration       methods described in the Q&As.
• A health flexible spending arrangement (FSA) that does      not qualify as excepted benefits is not integrated with a      group health plan, and thus will fail to meet the preventive services      requirement.
  • Effective retroactively as of September 13, 2013, a       health FSA that is not offered through a cafeteria plan (a plan which meets specific       requirements to allow employees to receive certain benefits on a pre-tax       basis) is subject to the annual dollar limit prohibition and will fail to       comply with this requirement.
• Effective for taxable years beginning after December      31, 2013, an employer is prohibited from providing a qualified health plan      offered through a Health Insurance Exchange as a benefit under the      employer’s cafeteria plan.

The agency guidance applies for plan years beginning on or after January 1, 2014, with certain exceptions, but may be applied for prior periods. Visit our section on HSAs, FSAs, & Other Tax-Favored Plans for more information on these types of arrangements.