Starting in 2014, the health reform law caps Flexible Spending Arrangements (FSAs) at $2,500, which has triggered the IRS shift to permit employees to carry over up to $500 of unused amounts in FSAs. The change ends years of complaints that health care dollars were being spent unwisely at the end of each year just to drain FSAs.
This is a huge change for the IRS. The IRS position since the early 1980s is that you can’t use an FSA to defer money from one year to a later year, so for them to come out and say you can carry over $500 is a major change in position.
The new IRS rules say that health plan sponsors now may let participants carry over from one plan year to the next but health plan sponsors will still have the existing option to offer a 2.5-month grace period for participating employees to use their FSAs after the end of the calendar year. However, insurance plans can’t have both a grace period and a carryover option. Employers have to adopt one or the other plans.