This announcement from the IRS: “Treasury and IRS to Provide More Time to Spend FSA Funds.” Excerpt:
Today the Treasury Department and the IRS issued Notice 2005-42 which will allow employers to modify Flexible Spending Arrangements (FSAs) to extend the deadline for reimbursement of health and dependent care expenses up to 2½ months after the end of the plan year. Previously, employees were required to “use-or-lose” FSA funds by the end of the year. Under the old rules, any unspent funds at year’s end would be forfeited.
What do employers need to do to take advantage of the “grace” period for their FSAs? The Notice provides that employers must amend their plans:
An employer may adopt a grace period as authorized in this notice for the current cafeteria plan year (and subsequent cafeteria plan years) by amending the cafeteria plan document before the end of the current plan year.
See IRS Notice 2005-42 for more details.
KaiserNetwork.org reports on the development here.