(Q) What is the Grace Period? Top
(A) On May 18, 2005, the IRS announced an exciting change to the Flexible Spending Account (FSA) rules that goes a long way towards eliminating the sting of use-it-or-lose-it. The IRS has officially adopted the concept of a “Grace Period” which is optional to the employer. Under this new ruling, money unspent at the end of the plan year can now be rolled over into the next plan year for 2-½ months. Thus, employees contribute for 12 months but have 14-½ months to incur expenses and use up the remaining money. The maximum grace period is until the 15th day of the third calendar month after the end of the plan year.
What this means is that there will no longer need to be the “end-of-year” rush to make purchases in order to use up remaining FSA contributions. Instead, participants will have an additional 2-½ months beyond the end of the plan year to incur new expenses that can be used to claim the unspent funds.
(Q) Is the 2-½ month Grace Period available for the health care and dependent care accounts? Top
(A) No. It is only available for the health care account.
(Q) Does the employer need to update plan documents to include Grace Period Language? Top
(A) Yes. If you are interested in offering the grace period to your employees, you are required to amend your plan documents before the end of the plan year to which the grace period relates.
(Q) What issues should an employer be aware of if considering implementing a high deductible health plan (HDHP) and a Health Savings Account (HSA) where the FSA has the 2.5 month Grace Period provision? Top
(A) Prior to January 1, 2007, an individual who had an FSA with a 2.5 month Grace Period was not allowed to contribute to an HSA until the FSA grace period had expired. The new rule now allows an individual to establish or contribute to an HSA as long as he or she either:
Has a zero balance in the FSA on the last day of the plan year. OR
- The employer amends the FSA to be HSA-compatible during the grace period for all participants (including those not covered by the HDHP/HSA), individuals would not be disqualified from contributing to an HSA during the grace period.
(Q) If I have $50 left in my Flexible Spending Account at the end of my plan year, am I able to incur new expenses and be reimbursed for the money I have left to spend? Top
(A) Yes. You may incur expenses for your previous plan year through the 15th of the third month after the end of that plan year. For example, calendar year plans that end on December 31 have through March 15th to incur expenses for the prior year funds.
(Q) How long do I have to submit receipts for the previous plan year? Top
(A) Your “run-out” period to submit claims for the previous plan year will remain unchanged at 90 days after the end of the plan year. There will not be an additional 90 days for claims incurred in the 2-½ month grace period.
(Q) When receipts are submitted during the 2-½ month Grace Period, which FSA dollars will be used first for reimbursement, last plan year’s or this plan year’s? Top
(A) During the 2-½ month Grace Period:
Claims with dates of service from last year will be reimbursed from last year’s unused amounts.
Claims with dates of service from this year will be reimbursed from this year’s elected amount.
If at the end of the Grace Period there is still an unused balance from last year, FlexBank’s system will automatically re-assign claims from this year as to use up the remaining balance, if applicable.
John is a participant in a calendar year FSA.
He has $50 left to spend on December 31st and has the additional 2-½ months to incur new expenses for his $50 balance.
He has elected $500 for the new plan year.
In January, John incurs and submits a $90 receipt for contact lenses. This $90 would be reimbursed from the $500 for the new plan year, leaving a balance of $410.
In February, John submits another claim for $20 doctor office copay incurred in December of last year. This amount would be reimbursed from the remaining unused balance from last year leaving an unused balance of $30.
Further assume that John submits no further expenses during the Grace Period for expenses incurred in either plan year. Shortly after the close of the Grace Period, FlexBank’s system will re-assign $30 of expenses incurred during this year to use up the remaining unused balance of $30 from last year. John’s remaining unused balance from this year would then be increased from $410 to $440.
(Q) What happens to the money if it is not used within the plan year plus the 2-½ month Grace Period? Top
(A) Any monies not used will be forfeited.