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One of the biggest drawbacks of a Flexible Spending Account (FSA) is the "Use it or Lose it" rule. This rule stipulates that FSA account holders must use the entirety of their tax-free funds before the end of each plan year, or forfeit any remaining FSA funds to their employer.
However, employers can offer options that make forfeiting FSA money easily avoidable if healthcare spending is carefully planned over the course of a year. Let's explore how the Carryover Rule and Grace Period can save you money.
The FSA Carryover Rule
FSA account holders may carry over up to $640* of their pre-tax funds at the end of their plan year into the following plan year's allocation — that is, if their employer allows for this option. This is a huge boost for eligible account holders. Those who would have been turned off by the idea of having an FSA due to the "Use it or lose it" rule may feel far more freedom to set aside pre-tax money for healthcare expenditures throughout the year without worrying that a huge chunk of their hard-earned salary will be forfeited because they failed to spend it all by their deadline.
The FSA Grace Period
Another fund-saving option that employers may offer a 2.5 month grace period. Employers who offer FSAs under a cafeteria plan can extend their employees' FSA benefit period for up to 2.5 months after the end of plan year. The intent is to give employees additional time to spend their FSA funds-and incur new expenses.
However, employers can only offer either a carryover or a grace period for their FSA, but not both, so employees will need to inquire with their benefits administrator or HR department to learn the ins and outs of their flexible spending accounts.
Should I be concerned about the "Use it or lose it" rule?
Employees should still be mindful of the "Use it or lose it" provision. But as long as FSA users pay attention to their payroll allocations throughout the year, spend their funds wisely, and check in with their benefits administrators, they should have no problem enjoying the tax savings FSAs offer on a huge range of qualifying medical products and services.
*Limit for plan years ending in 2024.
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