FSA Carryovers, Grace, and Runoff Periods Explained
When it comes to Flexible Spending Accounts (FSAs), the term “use or lose” may come to mind. But what does that term really mean?
In short, if participants do not use their FSA election amount during the plan year, any remaining FSA 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.
Carryover Provision
A carryover provision allows participants to carry over unused Healthcare Flexible Spending Account (HCFSA) or Limited Purpose Flexible Spending Account (LPFSA) contributions to the next plan year. For 2025, the maximum carryover amount indexed annually by the IRC is $660 (or less depending on the amount set by the participant’s employer). The money may be used to reimburse eligible medical expenses incurred throughout the following plan year.
Let's use an example to make it clearer. Imagine your plan year ends on December 31, and there's a three-month runoff period. You're allowed to carry over $660 into the new plan year. Employee A had $780 in their HCFSA at the end of the plan year and elected $1000 for the new plan year.
Employee A has until March 31 to submit expenses incurred during the previous plan year to be reimbursed from the remaining $780. On February 15, Employee A incurs $700 in expenses for the new plan year and submits them. They are reimbursed $700 on February 20.
Then, on March 10, Employee A submits a $100 claim for expenses incurred in the previous plan year. Since the employee had $780 unused at the end of the plan year and incurred $700 in the new plan year, only $80 would be available during the runoff period to cover any expenses from the previous plan year. The employee would be reimbursed $80.
However, if the employee had submitted the $100 claim before the $700 claim, and it was still during the runoff period, they would be reimbursed $100 from the previous plan year. For the $700 claim, $680 would be reimbursed from the previous plan year's amount, and $20 would be reimbursed from the new plan year's election amount.
Grace Period
A grace period allows participants an additional two-and-a-half months following the end of the plan year to incur HCFSA or LPFSA 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, in this situation, can incur and submit a claim for reimbursement in February of the next year to get reimbursed from the previous plan year’s HCFSA up to the full unused amount.
It is important to note that a plan may not offer both a grace period and a carryover provision.
Runoff Period
The runoff period is the amount of time determined by plan design (generally, three months) 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 HCFSAs, LPFSAs, and Dependent Care Accounts (DCAs). Alternatively, if there are remaining funds from the previous year that are scheduled to carry over, submitting claims during the runoff period may reduce those funds, depending on the claim amount.
For example, if your plan year ends on December 31 and has a three-month runoff period, Employee A can submit a claim in February for an expense incurred in the previous plan year and be reimbursed from the previous plan year. 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 three months after the end of the plan year to submit the expenses. However, keep in mind, the grace period and runoff period run simultaneously.
During the runoff period, carryover amounts are available for the previous plan year's eligible expenses and the new plan year's eligible expenses. It’s important for employees to be aware of their expenses and the timing of filing for reimbursements.
Educating Employees
If your plan offers a carryover provision, grace period, and/or run-off period—and the plan ends December 31st—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 January 2025 and has not been updated for changes in the law, administration or current event.
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