Employee Benefit Update: FSA and HRA Roll-Overs Defined by IRS

New Updates for Health Reimbursement and Flexible Savings Accounts

Health Savings Accounts
Health Savings Accounts.

The use of Health Reimbursement Arrangements (HRAs) and Flexible Savings Accounts (FSAs) has grown over the last decade. Experts believe that the renewed interest in health savings arrangements is out of a need to manage out of pocket medical costs as the majority of group health insurance deductibles have increased by as much as 200% over the last few years. The Affordable Care Act has put undue strain on many consumers who have been forced to purchase high deductible health care plans, so HRA and FSA plans can offset things as they provide a tax and savings shelter.

Updates to HRA and FSA Carry Over and Use Rules in Effect

Recently, the Internal Revenue Service (IRS) announced updates to the roll-over allowances for FSA and HRA plans, much to the delight of participants. Late in December 2016, the IRS released Notice 2015-87 which clarified the new limits allowed under these plans. According to the notification, the new 2016 roll-over guidelines are as follows:

  • Employers can continue to roll-over $500 of unused FSA funds to the next plan year, provided it’s only for employees who elect to make their own contributions to their plans. The plans must remain active in order to the roll-over to take place.
  • Employers can limit the FSA carry-over amount to one plan year at a time, meaning they do not have to continue to allow plan funds to add up over the $500 per year amount. Employees must request the roll-over at the end of each year, and they should do so as soon as they know they will not be using their funds up.
  • The alternative grace period is still in effect for FSA participants. They have two and a half months to incur additional expenses and use prior-year funds to pay for them. After that, all unused funds over the $500 roll-over are forfeited to the employer.
  • HRA and FSA plans can no longer overlap, therefore employees need to make informed decisions of how and where they plan to spend their dollars. If a plan member has an FSA plan and pays for a medical cost, and the employee’s spouse attempts to use their HRA to pay for the same medical costs, the IRS will be alerted.

     

    What does this mean for employers?

    It’s critical that employers take the time to explain to FSA and HRA participants about their rights under the revised IRS guidelines. They can send out a copy of the new rules along with benefits enrollment information for all new hires, and update employees via email and a mailed letter now. Each company can hold a benefits question and answer session hosted by the benefits administrator to review this new ruling with employees. In addition, plan sponsors will be sending out information to participants so they can be aware of the new rules.

    In terms of managing the carry over requirements, employers should carefully monitor all end of year activities and encourage employees to use up their FSA funds by the end of the plan year, reserving their HRA funds for other costs (as they retain them in full). It is possible to provide each employee with a statement showing their balance and giving them guidelines of how they can use them up by the end of the plan year. Any carry-over and forfeited funds must be carefully documented and employees will be furnished a copy of a statement for their personal records.