On May 18, 2005, the IRS issued Notice 2005-42 which allows the deadline for incurring FSA and DCAP expenses to be extended for up to 2 ½ months after the end of the plan year. Medical expenses incurred during this period can be reimbursed from funds remaining in the accounts at the end of the Plan Year.

Here are the highlights of the Notice.

• Employers can modify their plan documents to add a grace period up to 2½ months. Any eligible expenses incurred during this grace period can be reimbursed from any unused amounts remaining at the end of the Plan Year.
  
• The grace period must apply to all participants and cannot extend past the 15th day of the third calendar month after the end of the Plan Year.
  
• Except for the grace period, the use-it-or-lose-it rule requirements remain—no cash-out, conversion, or carry-forward of funds is allowed.

Before this Notice, only expenses incurred within the Plan Year would be eligible for reimbursement, and any unused money would be forfeited. This Notice is IRS's response to the many requests they have received to eliminate or modify this rule (known as the “use-it-or-lose-it” rule).

“The new rule will give workers with FSAs more time to pay for medical and dependent care expenses and will ease the year-end spending rush prompted by the prior rule,” stated Treasury Secretary John Snow.

What happens now?

When you read the ruling, you can readily see that this ruling poses many unanswered questions. (Click here to read an analysis of this ruling by John Hickman and Ashley Gillihan of Alston & Bird.) DataPath is studying these questions before deciding on what actions it should take in response to this ruling.

We need your input!

We also need your input on the effect of this ruling on your market, how you may want to address the issues, and what system modifications you want. We have designed a survey to gather this information. You can participate in this survey by clicking here or visiting www.dpath.com. Please send in the survey as soon as possible.

DataPath is giving their full attention to this Notice and its ramifications. Once we have received your input and we have received guidance from our attorneys, we will decide on the course that should be taken. As soon as that happens, we will notify you of the results. Just be assured that we are exercising the utmost urgency in this matter.

Click here to read IRS Notice 2005-42 (May 18, 2005).
Click here to read the Treasury press release.
Click here to read an in-depth analysis (Ashley Gillihan and John Hickman, Alston & Bird).
Click here to take the survey.