When talking about Health Flexible Spending Accounts (FSAs), you may hear the terms carryover, grace period and run-out period, but what do they mean and how do they differ? Here are some simple explanations of each term.
FSAs have historically been known for their “use-it-or-lose-it” feature. In the past, employees had to forfeit any unused funds at the end of the plan year. In October of 2013, the Department of Treasury issued new regulations which optionally allow employers to include a carryover provision to their FSA. This provision allows employees to carryover up to $500 of unused FSA funds from the previous plan year into the following plan year. The carryover provision is also sometimes referred to as the rollover provision.
Before the carryover provision became available, a grace period provision was made available by the Department of Treasury. This provision was optionally made available in 2007 and was also issued in response to the use-it-or-lose-it feature. The grace period provision essentially extends the plan year for an additional 2 ½ months, allowing eligible expenses to be incurred over a 14 ½ month time period rather than a 12-month time period. For example, an FSA plan year that started on January 1, 2019 and included the grace period provision would allow employees to be reimbursed for medical expenses incurred through March 15, 2020.
It’s important to point out that an employer can include the carryover provision or the grace period with their FSA, but not both. An employer can also choose not to incorporate either provision.
Most FSAs include a period of time after the end of the plan year which allows employees to request a reimbursement for medical expenses that were incurred during the plan year. The run-out period simply gives employees additional time to gather and submit documents and receipts for medical expenses incurred during the plan year. This is especially helpful for employees who incur medical expenses towards the end of the plan year. The run-out period is usually 30, 60 or 90 days. An employer can have a run-out period in addition to carryover or a run-out period in addition to a grace period. Run out periods are not required, but almost every FSA plan includes one.