EBIA Weekly Newsletter

IRS Information Letter Confirms Health FSA Carryover Basics

   September 6, 2018

IRS Information Letter 2018-0012 (June 1, 2018)

Available at https://www.irs.gov/pub/irs-wd/18-0012.pdf

The IRS has issued an information letter that confirms, and calls attention to, the limits that apply to health FSA carryovers. The letter responds to a request that the rules regarding health FSAs “be changed to allow savings to be accumulated in these accounts over several years.” In the letter, the IRS notes that under current law, health FSAs can provide for the carryover of unused amounts on a limited basis (see our Checkpoint article). Specifically, employers can include a provision in their health FSAs allowing unused balances of up to $500 remaining at the end of a plan year to be carried over to the next plan year. The letter also discusses two other arrangements—HSAs and HRAs—that permit funds to be accumulated and used for medical expenses that are incurred in later years.

EBIA Comment: The letter is a helpful reminder of the basic rules regarding health FSA carryovers. Offering health FSA carryovers is optional, and is an alternative to offering a health FSA grace period. (Health FSAs allowing carryovers from a plan year cannot also have a grace period with respect to that year.) This exception to the use-or-lose rule can help to reduce health FSA forfeitures and may encourage more employees to participate in health FSAs. It may also ease the year-end spending rush that occurs under many health FSAs. Of course, there are also administrative and compliance issues to be considered when determining whether health FSA carryovers should be implemented. For more information, see EBIA’s Cafeteria Plans manual at Sections XVI.B (“Grace Periods and the Use-or-Lose Rule”) and XXI.H (“Carryovers and the Use-or-Lose Rule”). You may also be interested in our upcoming webinar “Health FSA Grace Periods and Carryovers” (live on 11/7/18).

Contributing Editors: EBIA Staff.