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.