Carryovers, grace periods, and runoff periods - what are the differences?
When it comes to Section 125 Plans, the term “use or lose” may come to mind. But, what does that term really mean?
In short, if participants do not use their full election amount during the plan year, any remaining funds will be forfeited. This is an Internal Revenue Code (IRC) limitation, and something employees may not fully understand. To help your employees avoid forfeited funds, it’s important to provide education about terms that may affect their plan—like carryover, grace period, and runoff period.
A carryover provision allows participants to carry over up to $500 of unused Healthcare Flexible Spending Account (HCFSA) contributions to the next plan year. The money may be used to reimburse eligible medical expenses incurred throughout the following plan year.
For example, if your plan has a $500 carryover and Employee A has $750 in their HCFSA at the end of the plan year, Employee A can take $500 to the next plan year and will forfeit $250.
A grace period allows participants an additional two-and-a-half months following the end of the plan year to incur HCFSA claims and still receive reimbursements from the plan year that just ended.
For example, let’s say your plan year ends on December 31 and has a grace period. Employee A can incur and submit a claim for reimbursement in February of the next year to get reimbursed from the previous plan year’s HCFSA.
It is important to note that a plan may not offer both a grace period and a carryover provision.
The runoff period is the amount of time determined by plan design that a participant can submit claims and documentation for expenses incurred during the plan year that just ended. If applicable, claims incurred during the grace period may also be submitted during the runoff period. The runoff period applies to both HCFSAs and Dependent Care Accounts (DCAs).
For example, if your plan year ends on December 31 and has a 90-day runoff period, Employee A can submit a claim in February for an expense incurred in the previous plan year and be reimbursed. Additionally, if your plan has the grace period and runoff period, Employee A may incur expenses for the additional two-and-a-half months and have up to 90 days to submit the expenses. However, keep in mind, the grace period and runoff period run simultaneously.
If your plan offers a carryover provision, grace period, and/or run-off period—and the plan ends December 31—it might be a good time to remind your employees to use their funds in the allotted timeframe so they don’t lose money.
For additional help educating employees about reimbursement accounts, please contact your American Fidelity account manager.
This blog is up to date as of November 2019 and has not been updated for changes in the law, administration or current event.