Important Information Concerning $500 Health FSA Carryover

Since IRS Notice 2013-71 was released, we’ve been busy answering employer questions about the $500 carryover option and what it means for their plan.  We’ve compiled the questions and answers into an FAQ document that can be found at the end of this posting ("Health FSA Carryover FAQs").   We anticipate updating the FAQs as more questions come in and will post updates to this blog.

Many clients have made inquiries about amending their 2013 plan year.  The decision to add the carryover provision for 2013 depends on a few factors, including whether or not an employer currently has a grace period.  We’ve divided this blog into sections in order to address those employers currently with a grace period and those who do not have a grace period.   To provide some perspective, first we’ll share the differences between the two options:

Grace Period: The grace period allows employees to access the total available balance from the prior plan year for claims incurred during the 2 ½ month grace period. There is no maximum on the amount they can use from the prior year balance during the grace period.  If none or only a portion of the prior year funds are reimbursed, the remaining funds are forfeited and there is no option to carryover any amount into the next plan year.  Participants with year-end balances greater than $500 may benefit from a grace period that contains no cap but has a shorter duration for incurring and submitting claims.

Carryover: This option allows employees to carryover up to $500 of the balance remaining from the prior plan year.   Balances above $500 that are remaining from the prior plan year and not used to reimburse prior plan year expenses are forfeited.  Employees are eligible to access up to $500 of the prior year funds during the run-out period for current plan year claims.  At the end of the run-out period, up to $500 of the prior year balance, adjusted for any claims incurred and reimbursed during the run-out period, is carried over.  

Employers with the Grace Period

Employers that currently offer a grace period and want to add the carryover will need to amend the plan to eliminate the grace period provision and add the carryover no later than the end of the plan year from which amounts may be carried over.  This means that an employer wishing to allow a carryover for its 2013 plan year must amend the plan document prior to the end of its 2013 plan year to remove the grace period and add the carryover. 

Guidance from our attorneys cautions an employer from making a change to the grace period mid-plan year due to the risk of a participant claim under ERISA.  Because of the timing of the IRS Notice so late in the year, and the fact that employees made their elections on the basis of having a grace period, it is our recommendation that employers offering the grace period continue with the grace period for the 2013 plan year and amend the 2014 plan year to remove the grace period and add the carryover.  However, if a client wishes to amend their 2013 plan year, Discovery Benefits is prepared to accommodate this request with the necessary plan amendments.

Employers without the Grace Period

Employers who do not currently have a grace period and want to add the $500 carryover provision can do so for 2013.  Employers have until the end of their plan year in 2014 to complete the amendment process as long as the plan amendment is effective back to the beginning of the 2013 plan year and the employer communicates to employees the new carryover provision.

Communication is Key during 2014 Open Enrollment

Employees will need to know about the carryover option as soon as the decision is made to add it so they can budget the remaining health FSA election dollars for the current plan year and rethink their 2014 health FSA election.   We anticipate that employers will see an increase in both the number of participants and the amount of an employee’s health FSA election over time. 

One of the biggest hurdles for employees when deciding whether or not to participate in a health FSA was the “use or lose” rule, which created employee concern that they would lose funds if they did not incur expenses within the plan year.  The carryover provides employees relief from the “use or lose” rule since they can carryover up to $500 each plan year.  In turn, the carryover will provide employees with increased motivation to enroll in the health FSA.  This is great news for an employer since for each dollar deducted pre-tax, the employer saves 7.65% in matching FICA savings.  Here is a conservative example of the type of savings an employer with 250 health FSA participants may see:

Without Carryover

Annual Election

Number of Participants

Total Annual FICA Savings (7.65%)

Average Election





With Carryover

(assumes a 10% increase in Participation and Average Election)

Annual Election

Number of Participants

Total Annual FICA Savings (7.65%)

Increase in Annual FICA Savings

Average Election ($1,650) plus Carryover ($500)






This increase in participation and election amounts will provide the employer with increased payroll tax savings over time, offsetting any reduction in forfeitures.   By their very nature, forfeitures tend to fluctuate from year-to-year.   Over time, employees gain more experience in knowing how to calculate their elections appropriately, thereby reducing the amount remaining in the FSA at the end of the plan year.   Employers that do not offer the grace period would tend to see a greater decrease in forfeited funds than those who do, since employees with the grace period remain eligible to access prior year funds during the first 2 ½ months of the current plan year.  The carryover may reduce forfeited funds because health FSA participants are eligible to carry over up to $500 each plan year.   We expect an employer will, over time, more than offset the reduction by the increased payroll tax savings.

How to Request an Amendment to Your Plan

We’ve created a simple one page form an employer can complete to provide us with the necessary plan information needed to create the plan amendment.  The form can be accessed by clicking on the link below ("Health FSA Carryover Amendment Request Form")  and will also be posted at  If you have any questions, please contact our Account Management team at 877-765-8810. 

Health FSA Carryover FAQs.pdf (229.54 kb)

Health FSA Carryover Amendment Request Form.pdf (100.85 kb)