IRS Announces New Health FSA Carryover and 2014 Benefit Plan Limits

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The U.S. Treasury Department and the Internal Revenue Service (IRS) have announced updated guidance permitting carryover of up to $500 of unused health flexible spending account (FSA) balances at the end of a plan year.

Highlights of the guidance include the following:

  • The IRS has modified the rule requiring unused amounts to be forfeited, commonly referred to as the “use-or-lose” rule, by allowing carryover of up to $500 from one plan year to the next plan year.
  • Any unused amount in excess of $500 at the end of the plan year is forfeited.
  • A cafeteria plan adopting the carryover provision is not permitted to provide a grace period, which generally allowed payment for expenses incurred within 2 ½ months of the end of the plan year with respect to health FSAs.
  • Cafeteria plans must be amended to adopt the carryover provision and remove the grace period rule, if applicable.
  • Amendments to adopt the carryover provision generally must be adopted on or before the last day of the plan year from which amounts may be carried over.
  • For a plan year beginning in 2013, an amendment including the carryover provision may be adopted on or before the last day of the plan year that begins in 2014.

The IRS has also announced the new cost-of-living adjustments for retirement plans for 2014. Several key limits will change next year. Employers should take note of the changes and consider how they will affect the administration of their retirement plans.

  • The limitation on the exclusion for elective deferrals, which applies to 401(k) plans and 403(b) annuities, remains unchanged at $17,500. The limitation for catch-up contributions to an applicable employer plan for individuals age 50 or older also remains the same at $5,500. Similarly, $2,500 remains the limit for savings incentive match plans for employees (SIMPLE) arrangements.
  • The annual addition limitation for defined contribution plans continues to increase slightly from $51,000 to $52,000. For defined benefit plans, the limit on the annual benefit amount increases from $205,000 to $210,000.
  • The annual limit on maximum compensation that may be taken into consideration for retirement plan purposes changes from $255,000 to $260,000.
  • For employee stock ownership plans, the dollar amount for determining the maximum account balance subject to a five-year distribution period increases from $1,035,000 to $1,050,000. Additionally, the dollar amount used to determine the lengthening of the five-year distribution period changes from $205,000 to $210,000.
  • The annual compensation limit for eligible participants in certain governmental plans that allow cost-of-living adjustments to the compensation limitation under the plan increases from $380,000 to $385,000.
  • The contribution limit for SIMPLE arrangements remains at $12,000. The compensation amount requirement for simplified employee pensions (SEPs) does not change from the current $550.
  • The limitation used in the definition of “highly compensated employee” remains unchanged at $115,000. The dollar limitation for a “key employee” in a top-heavy plan increases from $165,000 to $170,000.
  • The limitation on voluntary employee salary reductions under cafeteria plans for contributions to health FSAs remains unchanged at $2,500.

In addition, the Social Security Administration recently announced that the wage base for computing the Social Security tax (OASDI) in 2014 will increase from $113,700 to $117,000. This represents an increase of approximately 2.9%.
If you have any questions about the health FSA carryover provision or the new limits, please contact any of the attorneys on the Employee Benefits & Executive Compensation team at Bradley Arant Boult Cummings LLP.