Publications

Focus on Health Benefits IRS Modifies Cafeteria Plan "Use-It-Or-Lose-It" Rule

Fall 2005
Employment & Employee Benefits Developments - Fall 2005

Under guidance issued by the Internal Revenue Service (IRS) on May 18, 2005, employers are permitted to design their cafeteria plans so that participants can be reimbursed for health care and/or dependent care expenses incurred up to 2-1/2 months after the close of a plan year. This extended "grace period" for participants to use up their healthcare flexible spending accounts ("health FSAs") and dependent care spending accounts (DCAPs) for qualifying expenses will likely reduce participant forfeitures under plans that allow a grace period and may even encourage more employees to participate in health FSAs and DCAPs. In effect, employees now have to 14-1/2 months to spend down their contributions before unused amounts are forfeited under the use-it-or-lose-it rule, whereas under the prior IRS rule, health FSA and DCAP balances were forfeited if not used by the end of the 12-month period (or by December 31st for calendar year plans).