Employers can give employees up to 2½ months after the end of the plan year to spend unused money in their flexible spending accounts (FSAs). Since so many plans have a calendar-year basis for their plan years, many employers and plan administrators that chose to grant the grace period are handling claims from last year right now. So here are a few reminders about how it all works.
FSA participants whose employers offer a grace period can have up to 14 months and 15 days (the 12 months in the last plan year plus the grace period) to use the benefits or contributions for that plan year before those amounts are forfeited under the “use-it-or-lose-it” rule. That rule requires employees to forfeit any money not used to reimburse eligible medical expenses incurred during that year and that therefore is left in their health FSA at the end of the plan year.
Eligibility
An employer may offer employees a grace period of up to 2½ months to incur and be reimbursed for qualified medical expenses from their FSAs, provided the cafeteria plan document is amended appropriately. To take advantage of this grace period now, a cafeteria plan must have been amended before the end of the last plan year.
Example. If an employer with a calendar year plan year wanted to apply the rule for 2011, the employer would have had to have amended its cafeteria plan by Dec. 31, 2010 and claims could be reimbursed as long as they were incurred through March 15, 2012. Any contributions left over at the end of the grace period would be forfeited.
If an employer with a calendar year plan year wants to apply the rule for 2012, the employer would have had to have amended its cafeteria plan by Dec. 31, 2011 and claims could be reimbursed as long as they were incurred through March 15, 2013. Any contributions left over at the end of the grace period will be forfeited.
Grace Period Rules
The grace period must:
- be offered to all participants in the cafeteria plan;
- be applied immediately after the end of the plan year;
- be applied toward qualified expenses incurred during the immediately preceding plan year or the grace period for contributions that remain unused at the end of the immediately preceding plan year;
- be concluded not later than the 15th day of the third calendar month after the end of the immediately preceding plan year (that is, for a calendar-year plan, the grace period cannot extend beyond March 15); and
- provide that participants who do not use the remaining contributions or benefits before the end of the grace period must forfeit the funds at the end of the grace period.
Contributions cannot be cashed-out or converted to other taxable or nontaxable benefits.
Run-out Periods
Some employers permit employees an extended period to submit receipts after the grace period ends. This is referred to as the run-out period. This period allows employees to continue submitting claims for reimbursement during a specified time following the end of the year. During that period, reimbursement is drawn against the prior year’s health FSA for claims incurred during the previous plan year only.
Run-out periods are different than grace periods. Like grace periods, federal law and regulation do not require an employer to make them available. The run-out period is typically 90 days after the plan year ends; for instance, if a plan year ends on Dec. 31, 2011, the run-out period ends March 31, 2012. But the time can vary depending on what the employer deems appropriate.
Expenses incurred during the grace period must be postmarked no later than the last day of the run-out period. Forfeitures are calculated after the expiration of the run-out period.