If your company is among the approximately three-quarters of U.S. employers that have adopted the grace period option for its health care flexible spending account (FSA), employees have until March 15, 2015, to spend unused balances on eligible medical costs if you hold to a calendar year plan. The consequence for missing the deadline isn't as dire as this date was for Caesar, but it's still undesirable; industry data show that FSA beneficiaries forfeited more than $400 million back to their employers in 2010.
FSA No Longer a Strict "Use-It-or-Lose-It" Benefit
FSAs allow employees and their beneficiaries to use pretax dollars to pay for eligible out-of-pocket health care expenses such as co-pays, prescription medications, vision care, and dental work. FSAs are account-based plans funded by employees, although employers can also make contributions.
Health FSAs have traditionally been considered "use-it-or-lose-it" plans. As such, beneficiaries had to spend all money in their accounts by the end of the year or forfeit the remainder. Recently, however, the IRS permitted employers to offer participants more flexibility in an effort to reduce "wasteful" end-of-year spending as employees rush to spend their FSA accounts rather than lose the money. Now, employers that offer health care FSAs may allow one of two options (they may also choose to offer neither option):
- A grace period for employees to use their unused account balances from the current plan year to pay for medical costs incurred during the first 2.5 months of the next plan year before they must forfeit the money (the grace period applies to employees who participated in the health FSA plan as of Dec. 31, 2014); or
- A $500 carryover of unused health FSA money at the end of the year to apply to the next plan year. Any unused amounts in excess of the $500 will be forfeited.
Submit 2014 Expenses Before 2015 Expenses
Even with the grace period, claims need to be submitted by March 31 or participants will forfeit those funds. Encouraging your FSA participants to submit 2014 expenses before 2015 expenses will help ensure that the 2014 funds will be applied first.
With the federal government extending FSA spending rules, employees now have even less reason to forfeit those valuable funds.