Legal Alert: IRS Modifies “Use It or Lose It” Rule for Health Flexible Spending Arrangements

Summary: On October 31, 2013, the Internal Revenue Service (IRS) issued Notice 2013 -71 (the “Notice”), which made two significant changes affecting the administration of cafeteria plans under section 125 of the Internal Revenue Code. First, the Notice modifies the proposed regulations under section 125 to add a limited exception to the “use it or lose it” rule for health flexible spending arrangements (“FSAs”). Next, the Notice clarifies the “transition relief” that was provided in the preamble to those regulations allowing certain participants in non-calendar-year plans to make mid-year elections that are necessitated by the Affordable Care Act, even though there may not be a “change in status.”