FSA Grace Period & Other Rules to Know

Whether Open Enrollment is already over, or you’re in the middle of your plan year, it’s helpful to know your FSA plan rules.  For instance, does your plan have an FSA grace period?  Understanding how your plan works gives you more control of how to use your pre-tax dollars to your full advantage.  Here are important rules every Flexible Spending Account holder should know.

 

Know Your Plan Dates

Many FSAs run on a traditional calendar year, although plan dates can vary by employer.  For those who do have a calendar year plan, December 31 can be a significant deadline for FSA participants.

 

Use or Lose Rule

FSAs have a Use or Lose Rule, which means unused funds are forfeited and do not roll over into the next plan year.  Because of this, it’s important for account holders to remember their plan’s end date so funds can be exhausted before the Use or Lose deadline.  Some plans may offer a grace period or carry forward, which can either extend the plan year or allow funds to roll over.  Read on to learn more about these optional provisions.

 

FSA Grace Period

An FSA grace period provides participants with an additional two and a half months to incur eligible expenses after the end of the plan year.  With an FSA grace period, participants have extra time to exhaust their account balance. This is an optional provision your employer can add to your company’s FSA plan; check with your employer or Summary Plan Description (SPD) to see if your plan offers the FSA grace period.  Please note:  you must be actively enrolled on the last day of the plan year in order for the FSA grace period to apply.  If you term employment prior to the end of the plan year, the grace period no longer applies to your account.

 

Grace Period Example

Your plan begins January 1 and ends December 31, but your employer also offers the FSA grace period.  This means you actually have additional time – until March 15 of the following year– to incur eligible expenses.

 

Health FSA Carry Forward

Another option increasing in popularity is the FSA Carry Forward feature.  Like the FSA grace period, the FSA carry forward is an optional provision your employer can add to your FSA plan.  For 2024, the carry forward allows up to a maximum of $640 of unused Health FSA funds to carry forward into the next plan year.  The carry forward provision relaxes the IRS imposed Use or Lose rule by allowing participants to access unspent dollars in a new plan year.

Some plans impose a minimum account balance threshold, such as $25, that must be met in order for the carry forward to take place.  Additionally, the carry forward only applies to the Health Flexible Spending Account. Check with your employer or consult the SPD to see if your FSA plan offers this feature.

 

Carry Forward Example

Your plan begins on January 1 and ends on December 31.  On December 31, you realize you have $250 of unspent funds available in your Health FSA.  Because your plan offers the carry forward provision, those funds will not be forfeited.  Instead, your balance of $250 will carry forward into the next plan year where you can continue to use it on all eligible expenses.

 

Run-Out Period

A run-out period is the period of time when you can submit claims for expenses incurred during the plan year.  All FSAs have a run-out period. Many calendar year FSA plans offer a 90 day run-out period, but not all do.  If you’re unsure what your run-out date is, double check with your employer.

 

Run-Out Period Example (with the Carry Forward)

Your plan begins on January 1 and ends on December 31.  Additionally, your plan also has the Health FSA carry forward, so unused balances up to $640 can roll over.  The plan’s run-out period is March 31 of the following year, which is your deadline to submit all claims for expenses incurred during the plan year (January 1 – December 31).

 

Run-Out Period Example (with the Grace Period)

Your plan begins on January 1 and ends on December 31 and your plan also offers the grace period.  Your run-out period is March 31 of the following year, which means you have until this date to submit claims for any expenses incurred during the plan year as well as the grace period.

 

Pro Tip: Knowing your FSA plan’s plan year dates and whether you have the grace period or carry forward provision will help you better manage your account.  Remember, it’s important to know these rules so you can spend down your account balance – and maximize your savings!