AMAZING GRACE PERIOD: IRS EXTENDS USE-IT-OR-LOSE-IT RULE

In a surprise announcement, the Treasury Department and the IRS issued a new notice this week that allows employers to offer a grace period for the reimbursement of qualified benefit expenses under cafeteria plan flexible spending accounts (FSAs). Under the current rules, any unused amounts remaining in a medical or dependent care FSA after the end of the year are forfeited under the "use-it-or-lose-it" rule - until now.

Notice 2005-42 provides for a 2½ month grace period during which medical and dependent care expenses may be incurred and reimbursed after the end of the year. The grace period may not last longer than 2½ months after the end of the immediately preceding plan year (i.e., March 15th for calendar year cafeteria plans). In other words, qualified benefits (such as medical expenses in a medical FSA) incurred during the grace period may be reimbursed from unused FSA amounts remaining at the end of the immediately preceding plan year. This means that a participant may have as long as 14 months and 15 days (12 months in the current plan year plus the grace period) to incur and receive reimbursement for medical and dependent care expenses before any unused FSA amounts are forfeited.

Employers may take advantage of this new rule immediately by amending their cafeteria plans to adopt a grace period before the end of the current plan year.

To take advantage of this new grace period, please call or e-mail your contact in the Employee Benefits Group at Ice Miller. If you do not have a contact at Ice Miller, please contact Christopher S. Sears, Stephanie A. Smithey, or James D. Kemper, or visit us at www.icemiller.com to view a complete listing of our attorneys.