If you’re new to or unfamiliar with Flexible Spending Accounts (FSAs), there are some terms you need to know to help maximize the benefit of these tax-advantaged accounts. For example, when an FSA plan is set up, the employer has three options as to how to treat funds that haven’t been spent by the end of the plan year: Use It or Lose It, Grace Period, or Carryover.
Use It or Lose It
So many participants ask about “use it or lose it.” At one time, this was the only option for addressing funds left unspent at the end of a plan year. Now, as mentioned, it’s one of three options. For participants with this provision, unspent funds are forfeited to the employer.
Even if your plan does not apply the Use It or Lose It provision, it’s important to make a reasonable estimate of your medical expenses before committing to an annual election amount. Add up all of the prior year’s out-of-pocket medical expenses for you and your dependents. Then, consider any planned expenses for the upcoming year, like childbirth, braces, or scheduled surgery. Depending on the age and health of your dependents, you may also want to estimate for unplanned emergencies.
Run-Out Period Explained
Even if your plan has the Use It or Lose It provision, you likely have what is known as a Run-Out Period. However, not all plans include a Run-Out Period, and for those that do, the length of the Run-Out Period may vary.
The term “run-out” refers to a preset time in which you can file claims for a given plan year after it has ended. For example, if your run-out period runs from January 1 to March 31, you can file reimbursement claims for expenses incurred before December 31 at any point during that period. If your plan has Use It or Lose It, then the amount lost is not determined until the March 31 final claims filing deadline has passed.
Grace Period
The term “grace period” refers to another option for spending down an unused account balance. The grace period allows you to continue incurring claims in your new plan year against unspent FSA funds from the previous plan year. At the end of the grace period, any unspent funds from the prior plan year that have not been spent are forfeited to the employer.
For most plans, the grace period runs for two and a half (2.5) months after the end of the plan year. For instance, if your plan runs from January 1 through December 31, you may have until March 15 to use your remaining FSA funds for that prior year. However, the exact length of the grace period can vary from employer to employer. Plans with a Grace Period may also have a Run-Out Period.
Carryover
The final FSA term is “Carryover,” a provision under which FSA participants can automatically roll over a limited amount of unspent funds (up to $660 for 2025 plans) to the following plan year. The maximum Carryover amount depends on the plan setup. Plans cannot have both a Grace Period and a Carryover Period.
For more information, contact your benefits administrator or refer to the plan documents for your employer’s FSA plan.
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