IRS Liberalizes the "Use-It-or-Lose-It" Rule for Flexible Spending Accounts and Offers Other Transition Relief

November 07, 2013

In Notice 2013-71 (the “Notice”), the Internal Revenue Service (the “IRS”) has modified the so-called “use-it-or-lose-it” rule for health flexible spending accounts (“FSAs”) under cafeteria plans to allow participants to carry over up to $500 of unused amounts remaining at the end of a plan year to the next plan year. The ability to incorporate a carryover feature and avoid a forfeiture will be welcome news for employers and employees alike, for whom required forfeitures under the use-it-or-lose-it rule have long been a source of significant frustration. The Notice also clarifies existing transition relief regarding salary-reduction elections under non-calendar year cafeteria plans.

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