Flexible Spending Account Grace Period vs. Rollover
As the end of the plan year approaches for many flexible spending accounts (FSAs), there are two terms that participants in these benefits might start to hear more frequently: grace period and rollover. While they both relate to funds remaining at the end of the plan year, they have very different meanings.
Grace period is a designated time period after the end of the plan year that allows participants to incur services and be reimbursed with funds remaining in the prior plan year. The grace period cannot be greater than 2 ½ months after the end of the plan year, but can be shorter if the employer prefers. Plans are not required to have grace period, and the plan design feature can be applied to either health FSAs or dependent daycare FSAs. Any funds remaining in the benefit(s) after all eligible claims have been reimbursed are forfeit back to the plan.
Rollover is a newer plan design feature and allows up to $500 to be rolled into the next plan year if the funds are not used. The rollover funds are added to the available balance in the new plan year and can be used to reimburse expenses with a date of service in the new plan year. Funds that have rolled into the new plan year do not count towards the election maximum for that plan year, so the participant can elect up to the plan maximum and then have rollover funds added to the available balance. Rollover only applies to health FSAs; it does not apply to dependent daycare FSAs. Additionally, any funds over $500 will be forfeit if not claimed.
While it is up to the employer to choose if they would like to add the grace period or rollover feature to their FSA, they cannot have both features for the health FSA. Both options may provide employees with peace of mind as they are considering their elections and how much to elect for the FSA.