How Grace Periods for Flexible Spending Accounts (FSAs) Work

Some employers offer a grace period option for their employees' flexible spending accounts (FSAs).

With an FSA, you pay money into an account during the year, and you can use this money to cover healthcare costs. But you might have some money left over at the end of the year. Your employer might give you a certain amount of time to spend this money before it expires. This time is called a grace period.

Grace periods are applicable to both health FSAs and dependent care FSAs. The period begins the day following the end of the plan year and normally lasts 2.5 months, until March 15.

What Is an FSA?

An FSA (flexible spending account or flexible spending arrangement) is a type of savings account that you pay into throughout the year via payroll deductions. These medical spending accounts are offered by your employer. If you have a health plan through your job, you can use an FSA to pay for healthcare costs such as:

• Copayments
• Deductibles
• Some drugs
• Dental or vision care expenses
• Other covered healthcare costs

Using an FSA can reduce your taxes. You pay money into an FSA before it is taxed. In other words, you do not pay any taxes on the money you put into your FSA, thus reducing your taxable income. This means you’ll save an amount equal to the taxes you would have paid on the money you set aside.

The savings you can make in this way can be substantial. If you earn $50,000 a year and have a tax rate of 30%, TurboTax estimates that putting $2,000 in an FSA account will net you $600 in savings.

You generally must use the money in an FSA within the plan year. But your employer may offer one of two options:

• A grace period of up to 2.5 extra months to use the money in your FSA
  
• Carrying over up to $610 per year to use in the following year
  

Your employer can offer either one of these options but not both. Offering either of them is not required.

At the end of the year, or at the end of the grace period if that option is available, you lose any money left over in your FSA. So it's important to plan carefully and not put more money in your FSA than you think you'll spend within a year on things like copayments, coinsurance, drugs, and other allowed healthcare costs.

You can use the funds in your FSA for a huge variety of costs and products, even alternative treatments like acupuncture. With a doctor's prescription, you may be able to use the FSA to help pay for a gym membership or massage therapy. First aid products are generally covered, including items like bandages. Many over-the-counter medications and remedies are covered, but only if you have a doctor's prescription for them. These include common products like aspirin, cold medicine, antacids, acne cream, ear wax removers, and wart removers.

How FSA Grace Periods Work

Funds remaining in the FSA from the prior plan year can reimburse any eligible medical expenses accrued during this grace period. 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 normally begins Jan. 1 and ends March 15. At the end of this period, you will lose all of the money in the account.

Claims submitted during the grace period are automatically taken out of the prior year's remaining funds before drawing from the current plan year. The same applies if you use your FSA debit card to pay for the expenses: the prior year's remaining funds will be available on the debit card through the end of the grace period. When you swipe your card, any leftover funds from the previous year will be used first, then the card will use funds from the current year.

How does this work in practice? Imagine that your plan year ends on Dec. 31, 2022. At that point, you still have $150 left in unused funds in your FSA. Your employer offers a plan that has a grace period until March 15, 2023. On Feb. 5, 2023, you incur $400 in eligible medical expenses.

After your claim is submitted:

1. The remaining $150 from the 2022 plan is used first for reimbursement.
2. The other $250 comes out of the funds from the 2023 plan.

Grace Period vs. Carryover Provision

Employers can provide a grace period or a carryover provision for FSAs but not both. A carryover provision allows you to carry over a certain sum for the next plan year without a time limit on when you have to use it: That amount is $570 in 2022, rising to $610 in 2023. However, with both the grace period and carryover option, there was still a maximum $2,850 annual contribution limit in 2022, rising to $3,050 in 2023.

It is important to remember that you have until March 15 of the following year to incur eligible expenses but can submit claims 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.

The Bottom Line

FSA grace periods allow you to spend any money that is left in your FSA on medical expenses, even after the end of your plan year. Some employers offer this grace period, and some do not. It can last up to 2.5 months, until March 15.

You should check with your employer to see if your FSA has a grace period, and if so, what the deadline is to spend the money in your account. Otherwise, you will lose this money at the end of the grace period.

Correction—May 2, 2023: This article has been amended to state that the grace period also applies to payments made with FSA debit cards.