Know the difference: Decoding the FSA grace period, rollover and run-out
From the headline, this may sound like a training guide for your pup. And if you’re here for that kind of “rollover” advice, we have bad news. Instead, these are important terms to know if you have a Flexible Spending Account (FSA) -- though probably no less confusing than if you actually were a pup reading about tax-free health spending!
So here’s the deal. FSA plans have what’s known as the “use-it-or-lose-it” rule. Quite possibly, the most urgent-sounding name for a rule ever -- but for good reason. It means that the funds you haven’t spent within your plan year actually end up going back to your employer to help offset their own FSA-related costs and fees. (Don’t get angry at your company, though -- the IRS enforces this rule, not your employers.)
While this rule is still in place, three important changes have emerged over the past decade to provide some relief to FSA users and give you a second chance to use your tax-free health funds. Understanding the differences between these terms can help you unlock every possible tax savings available through your account, while also ensuring you don’t send any of your hard-earned money down the inescapable abyss of the FSA deadline.
Here are the three important and somewhat confusing terms you’ll hear being used when talking about “second chance” options to use your funds, and we’re here to make it simple for you.
● Grace period
● Run-out period
While these terms all relate to FSA funds at the end of the plan year, they have very, very (very) different meanings.
So let’s gracefully dive (run?) in and start with the first two terms, “grace period” and “run out.”