A:

Some employers offer the grace period option for their employee's flexible spending account, or FSA. The grace period is applicable to a health FSA and a dependent care FSA. It begins the day following the end of the plan year and lasts for two and a half months. It is designed to allow employees the opportunity to take full advantage of their non-taxable contributions when expenses fall short of what was originally projected.

Any eligible medical expenses accrued during this grace period can be reimbursed with funds remaining in the FSA from the prior plan year. The inclusion of the grace period extends the plan year to 14 months and 15 days as opposed to the 12-month actual plan. For calendar year plans, the grace period begins Jan. 1 and ends March 15. All funds remaining in the account at the end of the grace period are forfeited according to the "use-it-or-lose-it" rule, which requires all remaining funds in an FSA to be forfeited at the end of the plan year. Claims submitted during the grace period are automatically taken out of the prior year's remaining funds before drawing from the current plan year; however, in the event a debit card is used for eligible expenses, the funds are drawn from the current plan year.

Imagine, for example, your plan year ends on Dec. 31, 2013. At that point, you still have $150 left in unused funds in your FSA. On Feb. 5, 2014, you incur $400 in eligible medical expenses. After your claim is submitted, the remaining $150 from the 2013 plan is used first for reimbursement, and the other $250 is taken out of the funds from the 2014 plan.

Employers can provide a grace period or a carryover provision but not both. A carryover provision allows you to carry over up to $500 for the next plan year without a time limit of when it has to be used. However, with both the grace period and carryover option, there is still a maximum $2,500 annual contribution limit. To take advantage of the grace period option, FSA plans must be amended to include the option by the end of the prior year. If you were to have a grace period option for the 2015 year, your employer would need to amend your plan by Dec. 31, 2014 for a calendar year plan. Plans cannot be altered mid-year to include the grace period.

It is important to remember that you have until March 15 of the following year to incur eligible expenses, but claims can be submitted for reimbursement up until March 31. This 16-day window is known as the run-out period. After the run-out period expires, all unused funds are forfeited.

RELATED FAQS
  1. What's the difference between a grace period and a run out period?

    Find out what a health flexible spending account is and what a grace period and run-out period are and why they are so important ... Read Answer >>
  2. Are Flexible Spending Account (FSA) contributions tax deductible?

    Discover if contributions to your Flexible Spending Account (FSA) are tax deductible. Learn how it can reduce your taxable ... Read Answer >>
  3. Does a Flexible Spending Account (FSA) cover glasses?

    Obtain more detailed information about what medical expenses can be paid using a flexible spending account (FSA), including ... Read Answer >>
  4. Are Flexible Spending Account (FSA) items tax deductible?

    Learn how contributions from a Flexible Spending Account (FSA) are not subject to taxation; however, the expenses paid from ... Read Answer >>
  5. Can a Flexible Spending Account (FSA) be used for dental?

    Learn if flexible spending accounts (FSAs) can be used to pay for dental and orthodontic expenses. Read Answer >>
Related Articles
  1. Investing

    W.R. Grace – Maybe The Most Valuable Bankrupt Company Going

    Grace will emerge from bankruptcy as a great specialty chemicals company, but not a cheap one.
  2. Insurance

    Take Advantage of FSA Tax Savings

    Using a flexible spending account it not only a convenient way to pay health and child care expenses, it can also reduce your taxes.
  3. Taxes

    Save Money By Spending With A FSA

    ... And why using a FSA can help you beat the high cost of health care.
  4. Personal Finance

    A Quick List of FSA Eligible Expenses

    The ABCs of FSAs: What you can and can't use your Flexible Spending Account funds for.
  5. Personal Finance

    The Credit Card Balance Transfer Trap

    Before you transfer a balance to a credit card with a lower interest rate, know how it affects new purchases and other fine-print traps that can cost you.
  6. Financial Advisor

    Payroll Deductions Pay Off

    Find out how you can bypass or defer taxes on thousands of dollars each year.
  7. Taxes

    Tax Credit For Plan Expenses Incurred By Small Businesses

    Determine whether your business is eligible to claim a tax credit for establishing a retirement plan.
  8. Managing Wealth

    The Difference Between Being Fired And Resigning

    Here's a rundown of how the two scenarios differ and what you need to know about each.
  9. Insurance

    Here’s Why You May Be Blocked From HSAs Next Year

    A health savings account can help you save for medical expenses, but starting in 2017 it may be harder to get if your insurance is from Healthcare.gov.
RELATED TERMS
  1. Flexible Spending Account - FSA

    A flexible spending account is a type of savings account, usually ...
  2. Insurance Grace Period

    An insurance grace period is a defined amount of time after the ...
  3. Dependent Care Flexible Spending Account (FSA)

    A flexible spending account (FSA) designed to provide tax-exempt ...
  4. Financial Services Authority - FSA

    Regulating body for all providers of financial services in the ...
  5. Nonrevolver

    A credit card holder who pays his or her balance in full each ...
  6. Adequate Notice

    A written document that specifies in detail the terms and conditions ...
Hot Definitions
  1. Bubble

    1. An economic cycle characterized by rapid expansion followed by a contraction. 2. A surge in equity prices, often more ...
  2. Swap

    A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, ...
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  6. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
Trading Center