After having some time to consider the recent IRS guidance on the $500 carryover (sometimes called the “rollover”) for FSAs that we previously wrote about, additional issues keep coming to light. Here’s a quick list of just some of the issues that we have encountered that remain unanswered:
- As noted in our previous post, additional guidance is needed on the effect of this carryover on the status of a health FSA as an excepted benefit.
- How does the addition of the carryover impact the limited FSA COBRA obligation? Ordinarily, if a health FSA meets the conditions of being an excepted benefit as described in our earlier post, it is also eligible for a limited COBRA obligation. If a participant has an underspent account in such an FSA, then he or she only needs to be offered COBRA through the end of the year of the qualifying event (plus any grace period). If an employer provides additional contributions to the FSA with a carryover feature, can it qualify for this limited COBRA obligation?
- Even assuming it does, does the $500 carryover feature mean that the COBRA obligation has to extend through the end of the year after the qualifying event (if that is shorter than the otherwise maximum COBRA period)?
- Does the availability of the carryover feature make participants ineligible to make Health Savings Account contributions during the year of the carryover? Current IRS guidance would suggest that it does. For that reason, employers with high deductible health plans should think hard before implementing such a feature.
- Can an employer allow employees to make health FSA contributions by causing the carryover to be “limited purpose” (e.g., vision and dental expenses only), similar to the rules that currently apply to the grace period? If so, does the carryover have to be limited purpose for all participants, as the grace period does now?
These unanswered questions require some additional answers and plan sponsors should think hard about them before adopting this carryover feature.