How does an FSA work

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Some employers offer a grace period option for their employee's flexible expense account (FSA). The grace period applies to a health FSA and an FSA for dependent care. It begins the day after the end of the plan year and lasts two and a half months. It is intended to give employees the opportunity to make full use of their non-taxable contributions if the expenditure falls short of what was originally forecast.

Any eligible medical expenses incurred during this grace period may be reimbursed with funds remaining in the FSA from the previous plan year. The inclusion of the grace period extends the plan year to 14 months and 15 days in contrast to the 12-month plan. For calendar year plans, the grace period begins on January 1st and ends on March 15th. All funds remaining in the account at the end of the grace period expire according to the "use-it-or-lose-it" rule, all funds remaining in an FSA expire at the end of the plan year. Applications submitted during the grace period are automatically taken from the remaining funds of the previous year before they are drawn from the current plan year. However, if a debit card is used for eligible expenses, the funds will be drawn from the current plan year.

For example, imagine your plan year ends on December 31, 2013. At that point, you still have $ 150 in your FSA. On February 5, 2014, you will receive $ 400 in eligible medical expenses. After your application is submitted, the remaining $ 150 from the 2013 plan will be used for reimbursement first and the other $ 250 from the 2014 plan funds.

Employers can provide for a waiting period or a transfer provision, but not both. A carryover rule allows you to carry over up to $ 500 for the next plan year with no time limit if it needs to be used. However, with the grace period and carryover option, there is still a maximum annual contribution limit of $ 2,500. To take advantage of the grace period option, the FSA plans must be amended to include the option until the end of the previous year. If you had a grace period option for 2015, your employer would have to change your plan by December 31, 2014 for a calendar year plan. Plans cannot be changed in the middle of the year to include the grace period.

It is important to remember that you are eligible to receive eligible expenses until March 15th of the following year, but claims can be submitted for reimbursement until March 31st. This 16-day window is known as the phase-out period. After the expiry period, all unused funds will expire.