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IRS Amends "Use It or Lose It" Rule for Flex Plans

A grace period for using benefits has been added.

IRS Notice 2005-42

Background. Many churches have adopted flexible spending arrangements (FSAs, or "flex plans") as a way to allow employees to pay for medical expenses with "before tax" salary reductions. The law specifies that any salary reductions not used to pay for medical expenses by December 31 are forfeited. This rule is often referred to as the "use it or lose it" rule. It's a real hardship for many employees, and some members of Congress have been pressuring the IRS to relax this rule. In May, the IRS agreed to do so. In a published notice, the IRS stated:

A cafeteria plan document may, at the employer's option, be amended to provide for a grace period immediately following the end of each plan year. The grace period must apply to all participants in the cafeteria plan. Expenses for qualified benefits incurred during the grace period may be paid or reimbursed from benefits or contributions ...

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Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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  • August 1, 2005

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