Treasury Department Extends Deadline for Flexible Spending Arrangements
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On May 18, 2005, the Treasury Department and the Internal Revenue Service
provided employees with Flexible Spending Arrangements a two and one-half
month grace period to pay for uncovered or unreimbursed medical costs with
pre-tax funds. The notice modifies the so-called “use-or-lose” rule where
any unspent FSA funds at year’s end were forfeited. For employees to realize
the grace period, employers are required to amend their health plans by
the end of the year.
|"For employees to realize the
grace period, employers are required to amend their health plans
by the end of the year."
Health FSAs are employer-established benefit plans that reimburse employees
for specified medical expenses as they are incurred. These accounts are
allowed under section 125 of the Internal Revenue Code and are also referred
to as “cafeteria plans” or “125 plans.” The employee contributes pre-tax
funds to the account through a salary reduction agreement and is able to
withdraw the funds to pay for medical bills. The funds set aside in a flexible
spending account escape both income tax and Social Security tax.
Cafeteria plans do not allow participants to use contributions from one
plan year to purchase a benefit that will be provided in a subsequent plan
year. This rule is commonly referred to as the “use-it-or-lose-it” rule,
requiring that unused contributions or benefits remaining at the end of
the plan year be forfeited.
At the employer’s option, the May 18 notice allows a cafeteria plan document
be amended to provide for a grace period immediately following the end of
each plan year. The grace period must apply to all participants in the cafeteria
plan. The practical effect of the grace period is that each participant
may have as long as 14 months and 15 days (the 12 months in the current
cafeteria plan year plus the grace period) to use the benefits or contributions
for a plan year before those amounts are forfeited.
This Alert was written by
Nancy Taylor of the Washington,
D.C. office. Please contact Ms. Taylor at 202.331.3133 or your Greenberg
Traurig liaison if you have any questions regarding the subject matter of
© 2005 Greenberg Traurig
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to be construed or used as general legal advice. Greenberg Traurig attorneys provide
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