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. Do Flexible Spending Accounts (FSAs) expire?

    Learn if Flexible Spending Accounts (FSAs) expire, and the different ways they expire by providing a expiration date, grace ... Read Answer >>
  2. 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 >>
  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. Does a Flexible Spending Account (FSA) cover teeth whitening?

    Learn about Flexible Spending Accounts (FSAs), and understand the medical expenses on which an individual cannot use FSA ... Read Answer >>
  5. Dental coverage on flexible spending account (FSA)

    FSAs can be used to pay for certain dental expenses, including deductibles and co-payments. However, not all types of dental ... Read Answer >>
  6. Does FSA cover massages?

    Discover how you can use a flexible spending account (FSA) to cover massage expenses for qualifying medical conditions. Read Answer >>
Related Articles
  1. Insights

    Healthcare FSAs Increase Your Personal Savings

    This benefit could give you a return this year that puts many other investments to shame.
  2. Retirement

    Still Working? Here's How to Invest for Retirement

    Here's how three different portfolios impact your retirement savings while you're still employed.
  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. Insurance

    Benefits Of A Dependent Care Flexible Spending Account

    These accounts can lower your taxable income and help you support a dependent family member.
  5. Insurance

    Health Savings vs. Flexible Spending Accounts

    When it comes to medical expenses, there are many accounts that provide tax advantages. HSAs and FSAs are two options often offered by employers.
  6. Personal Finance

    Don't Start the New Year Without a Financial Review

    Use the remaining days of 2016 to review your finances and plan ahead for the new year.
  7. Small Business

    Year-End Finance Tips for Small Firms and Freelancers

    Here's a robust end-of-the year tax-prep checklist for individuals and entities that earn 1099 income.
  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. 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.
RELATED TERMS
  1. Grace Period

    A grace period is a provision in most loan contracts which allows ...
  2. Financial Services Agency - FSA

    Financial Services Agency, or FSA, is a Japanese government entity ...
  3. Past Due

    Past due is a loan payment that has not been made as of its due ...
  4. Eligible Rollover Distribution

    An eligible rollover distribution is a distribution from one ...
  5. Health Reimbursement Account (HRA)

    A health reimbursement account (HRA) is an employer-funded plan ...
  6. Accountable Plan

    An accountable plan is a plan that follows IRS regulations for ...
Trading Center