A:

A health flexible savings account, or health FSA, is an account that you contribute money to where the funds are dedicated to medical expenses, such as deductibles and copays. You can put up to $2,500 in your health FSA each year, but that money must be spent during the plan year. A grace period and a run-out period are two important terms for those who have a health FSA.A grace period is the time that you have to incur medical costs once your plan year has ended. A grace period can be as long as two-and-a-half months, but employers decide if you get a grace period and how long it lasts. If your employer decides not to allow a grace period, then another option is to allow up to $500 to be carried over to the next plan year. Only one of these options can be used, but an employer is not required to use either of these options.

A run-out period is how long you have to file a claim for medical costs incurred during the plan year and during the grace period following the plan year. Run-out periods last 90 days after the end of the plan year. So, if your plan year is from Jan. 1, 2014, to Dec. 31, 2014, you have until March 31, 2015 to file a claim. The time between Jan. 1, 2015 to March 31, 2015 is your run-out period.

A run-out period and a grace period, if you have one, overlap and expenses incurred during the grace period must be claimed before the run-out period ends. Any money remaining in the account at the end of the run-out period that cannot be carried over into the next plan year is forfeited. Since you do not have to put the full $2,500 into the account each year, you should carefully decide how much to contribute so that you don’t lose money, especially if you have low medical expenses and your employer does not offer a grace period or a carry over.

Despite this use-it-or-lose-it downside, the biggest advantage of a health FSA is that you can contribute the money before taxes are deducted, essentially making the money tax free. Since the top tax bracket in 2014 is 39.6%, the highest potential tax saving on the full contribution amount of $2,500 is $990. The choice for this consumer is $1,510 in his or her pocket or $2,500 to pay for medical expenses. Those who are in lower tax brackets and those who do not contribute the full amount have a lower tax savings, but if you know you will spend the money anyway, you can put some of your tax money towards medical costs.

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

    Find out what grace periods and moratorium periods are, what you have to do to get them and how they can benefit your financial ... Read Answer >>
  2. Can a Flexible Spending Account (FSA) be used for a spouse?

    Learn about flexible spending accounts (FSAs) and how FSA funds can be used to cover qualified medical expenses incurred ... Read Answer >>
  3. Does money in a Flexible Spending Account (FSA) roll over?

    Get the latest information regarding current IRS regulations on how much money can be carried over from one year to the next ... Read Answer >>
  4. Do flexible spending accounts (FSA) funds roll over?

    Learn more about how flexible spending accounts (FSAs) are established, policies on rolling over funds, and what costs can ... Read Answer >>
  5. 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 >>
Related Articles
  1. 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.
  2. Financial Advisor

    HSA vs. FSA: Navigating the Alphabet Soup

    HSA vs. FSA: Here's a cursory view of these two types of workplace savings accounts to help you make the proper decision in making your elections.
  3. Insurance

    How to Maximize the Use of Your HSA

    A health savings account is an often misunderstood financial planning tool.
  4. 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.
  5. Insurance

    20 Ways to Use Up Your Flexible Spending Account

    You lose any remaining funds in your flexible savings account at the end of the year. Here is a list of things you can buy with the cash.
  6. Taxes

    Benefits Of A Dependent Care FSA

    Here's how your Dependent Care FSA works and how you can use it to your advantage as a parent with dependents.
  7. Personal Finance

    The Credit Card Balance Transfer Trap

    Before you transfer a balance to a credit card with a lower interest rate, understand how it affects new purchases and other fine-print traps that can cost you.
  8. 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.
  9. Insurance

    Benefits Of A Dependent Care Flexible Spending Account

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

    A Health Savings Account Can Make a Big Difference

    Health savings accounts provide excellent tax benefits but are often overlooked.
RELATED TERMS
  1. Grace Period

    A grace period is a provision in most loan contracts which allows ...
  2. Flexible Spending Account (FSA)

    A flexible spending account (FSA) is a type of savings account, ...
  3. Medical Cost Ratio - MCR

    Medical cost ratio is the comparison of a health insurance company's ...
  4. Holding Period

    A holding period is the amount of time an investment is held ...
  5. Employer-Sponsored Plan

    An Employer-Sponsored Plan is a benefit plan offered to employees ...
  6. Health Savings Account - HSA

    A Health Savings Account (HSA) is an account for individuals ...
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center