2005-08-24 CC Packet - Laserfiche WebLink

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At;giJim August 12, 2005 RE: FSA Administrative Change Dear valued client: In May, Acclaim Benefits sent an e-mail outlining an opportunity provided by IRS Notice 2005-42, which modified the customary "use-it-or-Iose it" rule for reimbursement from cafeteria plan flexible spending accounts ("FSAs"). Under the new rule, employers may amend their cafeteria plan documents to provide for a reimbursement "grace period" following the end of the traditional plan year. Specifically, the grace period provides participants with a maximum time extension of two months and fifteen days to incur claims that may be applied to the previous plan year's balance. Employers and employees will still follow a twelve-month plan year for pre-tax salary deductions, but allowable spending can occur for up to fourteen months and fifteen days. It is important to note that plans are not required to adopt this extension, nor are they required to adopt the fulI two month and fifteen day grace period. The extension is intended to alleviate the participant's burden to incur claims within a twelve-month period, thereby reducing the risk of forfeiting funds. Eligible expenses incurred during the extended grace period will be applied to any remaining balance applicable to the prior plan year. If the prior year balance does not cover the entire amount of a claim, the excess amount will be applied to the participant's current plan year balance. We recommend that employers proceed cautiously in adopting this non-mandatory change and strongly suggest that you consult with your legal, tax and/or benefits experts to determine whether the FSA change would be appropriate for your group. Special Considerations: Dependent Care Reimbursement Accounts: Participants may be reimbursed for dependent care expenses up to a statutory maximum amount, based upon the participant's individual tax year. The reimbursement amount is based on the year in which the reimbursements are made, regardless of the plan year from which any particular reimbursement is made. This could complicate the completion ofW-2 Forms. - Run-Out period: Following the end of a plan year, existing regulations allow for a "run- out period". The run-out period provides plan participants with additional time to submit reimbursement claims relating to expenses incurred during the most recent plan year. ...--7Employers who adopt the new grace period may want to revise their plan's existing run- out period deadlfri-e to extend past the expiration of the grace period. However, extending a run-out period too far into the future could create a time constraint when closing the plan year and completing Form 5500 filings. Flexible Spending Account Department . 3405 Annapolis Lane North . Plymouth, MN 55447 . www.acclaimbenefits.com . fax 763-278-4004 It