HR GlossaryFSA Grace Period

FSA Grace Period

A flexible spending account (FSA) grace period, or extension, is one of two alternate options a business’ plan administrator has to offer plan participants. The extension lasts 2.5 months (typically until March 15), allowing participants to submit and be reimbursed for expenses incurred during the previous plan year. Not all plans offer this option, which is not required by the IRS. 

What is an FSA grace period? 

FSA stands for Flexible Spending Account — a pretax payroll benefit associated with health, dependent, and elderly care. Some employers also offer spending accounts related to parking and commuting expenses. FSAs can only be elected during a benefits enrollment period. They cannot be changed during the year without the participant experiencing a qualified status change such as marriage, divorce, or adding or losing dependents. 

FSA extensions are not a uniform decision across all FSA plans. As plans are developed and documented, FSA administrators have three options: 

  • Not allow exceptions to the normal “use it by the end of the plan year or lose it” parameters.
  • Define an exception that allows the rollover of any unused funds to the new plan year instead of only allowing the rollover amount based on the IRS cap of $570.
  • Define an exception allowing plan participants to request reimbursement for expenses incurred during the associated plan year for an additional 2.5 months into the new plan year.

Not all portions of FSA plans are eligible for these options. For example: 

  • The rollover option is only available for Healthcare FSAs.
  • The extension option is available for Healthcare, Child Care, and Elder Care FSAs.

These exceptions to the standard IRS rules require documentation in the plan document before the plan’s inception. 

Why is an FSA grace period important to my business? 

FSA grace periods are a valuable option for your business because there are many instances when employees may incur eligible reimbursable expenses through the last day of the plan year. If the plan document doesn’t allow reimbursement requests after the plan year’s end, employees may lose the funds they had deducted from their paycheck for their health care savings account. 

One benefit of offering an extension rather than an all-inclusive rollover is that it requires less administrative work to ensure the total amount of the funds from the previous year are used before any current-year plan deductions are distributed. It also helps employees more effectively and accurately plan for their annual eligible expenses. There are no laws requiring businesses to offer FSAs to their staff. Still, because the funds are pretax dollars, businesses save 7.65% on tax and FICA contributions for every dollar deposited into the accounts. 

What is the history of the FSA grace period? 

FSAs were established in the 1970s in response to increased living expenses brought about by significant inflation. The Revenue Act of 1978 clarified the benefits and limits associated with health and dependent care FSA plans. The intent was to allow workers to set aside pretax funds to care for medical expenses they anticipated incurring during the year. 

As the workforce grew and the FSA concept matured, the IRS published new guidance in 2007. This new information allowed for a “grace period” permitting participants of qualified FSA benefit plans to submit expenditures incurred during their plan year for 2.5 months after the end of that same plan year. Over the years, there have been changes to what expenses the IRS considers eligible and ineligible for FSA reimbursement. Some examples of qualified expenses include: 

  • Copays
  • Medical equipment such as CPAPs, walkers, and wheelchairs
  • Prescription drugs

Examples of ineligible expenses include: 

  • Insurance premiums
  • Massages (unless ordered by a doctor and verified by a physician’s written prescription)
  • Over-the-counter care (unless required via a doctor’s note)

Summary 

An FSA extension or grace period is 2.5 months, which a plan administrator may include in the company’s FSA qualified document at the beginning of a new plan year as a viable option. This allows participants to submit expenses incurred during the plan year for up to two-and-a-half months into the administration of the new plan year. Not all FSA plans offer this option.