Some flexible spending account (FSA) participants have the unfortunate experience of forfeiting or losing unused funds from their Health Care FSA and/or Dependent Care FSA. In our experience, this usually occurs because the participants did not understand their plan’s provisions regarding its runout period, grace period, and/or rollover. Below is a broad overview of these three concepts followed by important best practices.

Runout Period

A Runout Period is an administrative period of time following the end of the plan year that allows the participant extra time to submit claims for eligible expenses incurred during the plan year. An expense is “incurred” when the participant is provided with the services for which they paid the expense. Runout periods are optional, but in our experience most employers offer runout periods for their Health Care FSA and/or Dependent Care FSA.

Example: Barry is enrolled in his employer’s calendar year Health Care FSA. The Health Care FSA has a 3-month runout period. Barry visits a health care provider on November 15 and incurs an eligible health expense. Because his employer’s Health Care FSA has a 3-month runout period, Barry has until March 31^st of the following year to submit a Health Care FSA claim for the health expense he incurred on November 15.

Grace Period

A Grace Period is an additional period of time for participants to incur claims after the end of the plan year. The maximum grace period duration is 2 months and 15 days. FSA participants can incur new expenses during this grace period and use the remaining funds from their prior plan year to be reimbursed for the expense as long as they submit the claim within the plan’s runout period. Like runout periods, grace periods are optional and are available for both Health Care FSAs and Dependent Care FSAs.

Example: Barry is enrolled on his employer’s calendar year Health Care FSA with a grace period of 2 months and 15 days. Barry has a balance of $250 in his Health Care FSA as of the end of the plan year. He incurs a new health expense on January 3 of the following year. Because he incurred the new health expense during the grace period, he can use the remaining FSA funds from the prior year to be reimbursed for his new health expense as long as he submits the claim within the plan’s runout period.

Rollover

A Rollover provision is an optional provision that employers can add to their Health Care FSA to allow up to a specified dollar amount to roll from one plan year to the next. This provision is available for Health Care FSAs; however, it is not available for a Dependent Care FSA. An employer cannot have both a grace period and a rollover in a Health Care FSA. The maximum amount a plan can allow to rollover is determined each year. Refer to www.ebcflex.com/planlimits to view the current rollover maximum.

FSA participants can use any funds that rollover at any time during the new plan year. In addition, if the FSA funds remain unused, they typically continue to rollover from one year to the next up to the maximum allowable dollar amount.  Employers can require participants to make a Health Care FSA election for the next plan year in order to receive the rollover and/or to maintain a minimum unused balance in order to rollover their Health Care FSA balance.

Example: Barry is enrolled on his employer’s calendar year Health Care FSA with a rollover feature and a 3-month runout period. At the end of the plan year, he has $250 remaining in his Health Care FSA. The remaining $250 rolls over to the next plan year and can be used to reimburse eligible health expenses incurred any time during the next plan year (and possibly plan years after that if it rolls over again).

Pro Tips

1. Employers should work with a reputable vendor like Employee Benefits Corporation to administer its FSA plans. A reputable vendor will review the various runout period, grace period, and rollover options with the employer and guide them to a solution that is right for them.
2. Document, document, document! Details regarding any runout period, grace period, and/or rollover should be included in the plan’s Summary Plan Description (SPD). We provide our clients with plan documents containing these details.
3. Be aware of how a grace period or rollover can impact Health Savings Account (HSA) eligibility for employees who participate in the Health Care FSA. Very generally, an employee who participates in a Health Care FSA with a grace period or rollover may have their HSA eligibility delayed. We can guide the employer through this potential landmine and offer FSA design solutions to lessen the risk of HSA ineligibility.
4. Stay informed on temporary or permanent changes in the law that impact runout periods, grace periods, and/or rollovers. For example, the government provided employers with significant and temporary flexibility during the COVID-19 pandemic with respect to their grace periods and/or rollovers. We regularly communicate with our clients about changes in the law that impact their FSA plans.

Have questions or want more information? Contact us.