Typical Flexible Spending Arrangements (FSAs) (also commonly called flexible spending accounts) allowed employees to set aside money pre-tax to pay for medical expenses not covered by insurance, including deductibles, copays, and dental and vision expenses. The employee would determine the amount to be set aside for the year (up to a maximum of $2,500), and equal amounts would be withheld from each paycheck and deposited into the FSA over the course of the year. The catch was that any funds in the account not used by the end of the year were forfeited. As a result, some employees chose not to participate at the risk of losing the money, and some employees found themselves incurring expenses at the end of the year solely for the purpose of using up the funds.

The IRS listened to public comments that the use-or-lose rule effectively encouraged unnecessary spending at the end of a year and that lower-paid employees (who the IRS was wanting to benefit) were reluctant to participate because of the potential the funds would not be needed. Notice 2013-71 allows (but does not require) an employer to allow a rollover up to $500 of funds remaining in an FSA account from one year to the next.

The IRS estimates 14 million families use FSAs. This change could have a large impact on the 14 million families already participating, and it may encourage other families to participate in coming years. The change in the rule goes into effect immediately, but employers have the option whether or not to offer the rollover. If an employer does decide to offer the rollover, the plan will need to be updated. The change can still be made to apply to this plan year.