News
New Grace Period Rule for the Medical Flexible Spending Account!
On May 18, 2005, the Treasury Department announced a new Flexible Spending Account (FSA) option, which allows more time for participants to spend their health care flexible spending account funds. If the Plan is amended, participants will now have a 2 and ½ month grace period after the plan year is over to incur eligible medical expenses (receive services) and submit those expenses for reimbursement from the prior year's remaining Health Care FSA balance. Note-This will not apply to any Dependent Care Assistance Plan that may be in place.
This enhancement gives participants the opportunity to utilize Health Care FSA funds that would otherwise be forfeited. For example, if your plan year ends December 31, 2005, the 2 and ½ month grace period would end on March 15, 2006, participants will have until March 15, 2006 to incur expenses which can be reimbursed from their prior plan year Health Care FSA election balance. If you implement the grace period, the Plan's run-out period (the time after the plan year has ended to submit eligible claims) has also been extended. Participants will have 120 days (grace period + 45 days) after the end of the plan year to submit claims. For example, if your plan year ends December 31, 2005, participants will have until April 30, 2006 to submit claims for services that were incurred in the prior plan year (1.1.05 – 12.31.05) AND the subsequent grace period.
FAQs
Does the grace period apply to both the Health Care FSA and Dependent Care FSA?
No. Due to potential tax issues from receiving more than the $5000 allowable Dependent Care FSA maximum in any calendar year, the grace period will not be added to the Dependent Care Assistance Plan. However, the run out period to submit Dependent Care FSA claims at the end of the plan year would also be extended to 120 days for ease and consistency.
If participants use their debit card during the grace period, which account balance will it reduce?
All debit card transactions during the grace period will automatically be applied to your prior plan year balance, if any, before being applied to the new plan year.
What happens if a participant terminates before the end of the Plan Year?
The grace period only applies to participants covered on the last day of the applicable plan year. If a participant terminates coverage prior to the last day of the plan year under the Health Care FSA or Dependent Care FSA, they will have 90 days from their termination date to submit claims for eligible expenses incurred (services received) through their termination date. The grace period will not apply.
How will claims submissions be applied to the participant's account during the grace period and run-out period?
Any claims submitted to HFS for eligible medical services incurred during the grace period will automatically be applied to the participant's previous year's Health Care FSA balance. Once that balance is exhausted, reimbursements will be made from their current plan year Health Care FSA election. Once the prior year's Health Care FSA balance is exhausted, any eligible expenses submitted will be reimbursed you're the current plan year election.
Example
Plan Year – 1.1.05 through 12.31.05
2005 Health Care FSA Balance - $250.00
Expenses incurred (services provided) in January, 2006 (during grace period) - $300.00
$250 applied to prior plan year's Health Care FSA balance and $50.00 applied to new plan year Health Care FSA balance.
What happens if at the end of the grace period, a participant still has a balance in their prior plan year's Health Care FSA account but no eligible medical expenses to apply to that balance?
In this instance, the “use-it-or-lose-it” rule applies and those Health Care FSA funds are forfeited. The funds can not be carried over to the current plan year, nor can they be received in cash or applied to other expenses.
What happens if an old receipt is submitted for an eligible medical expense incurred in the prior plan year after I already submitted claims for expenses incurred during the grace period and depleted by prior year's balance to $0 (example above)?
The request will be denied as the prior plan year's Health Care FSA balance has been exhausted. As noted in the previous answer, only eligible medical expenses incurred during the current plan year may be submitted for reimbursement once the prior plan year Health Care FSA balance (or when the grace period ends) is exhausted.
Can participants incur claims in the grace period if they do not re-enroll in a Health Care FSA for the subsequent plan year?
Yes. As long as they were an active Health Care FSA Participant on the last day of the prior plan year, they can incur eligible medical expenses during the grace period and submit claims against their remaining Health Care FSA balance from the prior plan year.