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GT Alert

Treasury Department Extends Deadline for Flexible Spending Arrangements (FSAs)

May 2005

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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 this Alert.

© 2005 Greenberg Traurig


Additional Information:

For more information, please review our Health Business Practice description, or feel free to contact one of our attorneys.


This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.