Whether you’re new to or familiar with Flexible Spending Accounts (FSAs), there are some key terms you should know. FSAs are employer-sponsored benefit plans which allow employees to set aside money before taxes to cover out-of-pocket healthcare expenses. When the plan is setup, the employer has several spending options to choose from: use it or lose it, grace period, and carryover. In order to max out your tax-free benefit dollars, it’s important to understand what these FSA terms mean.
Use it or Lose it
“Use it or lose it” is exactly what it sounds like. At the end of the plan year, if you don’t spend every penny of your election amount, you lose the remaining balance. That’s why it is important to make a reasonable estimate of your medical expenses for the year before making next year’s election.
To create an estimate, total up out-of-pocket medical expenses for you and your dependents for the previous year. Then, consider any planned expenses for the upcoming year; for example, child birth or vision correction surgery. Depending on the age and health of your dependents, you may also want to take into account unplanned emergencies.
If you forgot to file a claim for last year and are worried about losing that money, there is an option that gives you a little cushion for filing claims. This extra claims filing time is called a run-out period.
Run-out is a pre-set time period (outlined in the plan documents) that allows you to file claims for the previous plan year. For example, if your run-out period runs January 1 – March 1, during that time, you can file reimbursement claims for expenses incurred before December 31.
Keep in mind, run-out periods vary by plan.
Another spending option that may be a part of your FSA plan is a grace period.
Grace period allows you to use any unspent money in your FSA from the previous plan year for a predetermined amount of time. Grace period typically runs for two and a half (2.5) months after the end of the plan year. Think of it as a spending extension.
For instance, if your plan runs from January 1, 2019 through December 31, 2019, you would have until March 15, 2020, to use all of your FSA funds for 2019. Once the grace period ends, any leftover FSA balance for the previous plan year would be lost.
Another plan option is carryover, which can eliminate or lessen the hit from use it or lose it. Carryover allows FSA participants to roll over a maximum of $500 in unspent FSA funds to the following year. The maximum carryover amount depends on plan setup.
Think about the following scenario with a $500 carryover limit. If you elect $2,600, but only spend $2,300, you could carry over the $300 balance to next year. However, if you spent only $2,000, you could carry over $500, but lose the $100 difference.
It’s important to note that an employer’s plan cannot have grace period and carryover at the same time; it’s one or the other.
For full details on your employer’s FSA plan, contact your benefits administrator or refer to your plan documents.