Whether Open Enrollment is already over, or you’re in the middle of your plan year, it’s helpful to know if your FSA plan offers special provisions like 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 three important rules every Flexible Spending Account holder should know.
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. The carry forward allows up to a maximum of $500 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.
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 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 and grace period, or March 15.
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 prevent unused dollars from being forfeited and maximize your savings!