"The IRS has just released Notice 2005-42 (attached) regarding the "use it or lose it" rule of cafeteria plans. This is the rule that says that if a participant does not use amounts they have contributed during the year for certain expenses, those amounts cannot be paid to the participant and must be forfeited. Under this new Notice, cafeteria plans may now be amended to provide that expenses for qualified benefits incurred during a "grace period" following the end of a plan year may be paid or reimbursed from benefits or contributions remaining unused at the end of the immediately preceding plan year. This "grace period" cannot exceed two and one-half (2-1/2) months after the end of the preceding plan year. This is great news for participants in cafeteria plans, and many employers may wish to amend plans as soon as possible to allow for this additional period of time for participants to use qualified benefits. Certainly, employers with cafeteria plans can expect that their employees, upon learning of this development, will want them to change their cafeteria plan to provide for the grace period."