IRS Official Explains Rules For Health FSAs

Employees enrolled in health flexible spending arrangements (FSAs) cannot make the choice between waiving the carryover of up to $500 in unused FSA funds or electing the grace period for unspent funds, according to Kevin P. Knopf, a senior technician reviewer in the Internal Revenue Service Office of Chief Counsel, TEGE, Health and Welfare branch. Knopf works on guidance implementing the Patient Protection and Affordable Care Act (ACA).

Knopf said a plan can either offer a grace period or a carryover, but not both. “You have to choose which horse you want to ride,” he commented, during a November 26 American Law Institute-Continuing Legal Education (ALI-CLE) session on Healthcare Update: Recent and Forthcoming IRS Guidance and Operations.

Knopf said he has heard mixed opinions about whether Health FSA carryovers should be limited to participants who elect to make FSA contributions for the following year. He explained that one concern is that plans would be setting conditions on an employee’s right to their money.

A related concern is that a small FSA carryover amount could last for years, costing plans unnecessary administrative fees. “There’s no clear answer to that question at this particular time,” Knopf said. “We are aware of it and we’re thinking about it.” He suggested that plans that set minimum carryover amounts should be designed with employee relations in mind.

Upcoming guidance. W. Thomas Reeder, health care counsel in the IRS Office of Chief Counsel, said the IRS could release several ACA rules between late November and early January. He said the IRS will likely provide guidance on health care taxes and net investment income taxes for high income earners.

Also expect guidance on health insurer fees, medical loss ratios for Blue Cross and Blue Shield plans, and health exchange reporting for individuals who receive premium tax credits. Reeder also said to expect regulations dealing with small business tax credits, essential minimum coverage and executive compensation for health care companies.

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