With a new slate of temporary FSA changes being introduced in the Consolidated Appropriation Act 2021 in late December, flexible spending accounts (FSAs) are in the news yet again as millions of account holders turn the page to a new plan year and, potentially, new rules affecting how they will budget and spend their tax-free healthcare funds.
If you're one of the people who had an FSA plan year deadline on 12/31, or you're one of the 30 percent of Americans (SHRM, 2019) who have an FSA with a 2.5 month grace period, you should know about a little-known year-end provision that could help you maximize your tax savings from 2020: the FSA run-out period.
What is the FSA "run-out" period?
An FSA "run-out" period refers to the period of time in the new plan year during which account holders can file claims for expenses incurred during the previous plan year. This timeframe is chosen by the employer, not the IRS, and can last for any period of time, but the most common FSA "run-out" period is 90 days. For instance, if your FSA plan year ends on December 31 and you have a 90 day run out period, you would have until March 31 of the following year to submit claims for reimbursement.
Let's make thing one thing very clear at the outset: the FSA "run-out" period is NOT the same as the FSA grace period. The key difference being that the run-out period is to file claims from the previous year, while the FSA grace period is an extension of your current plan year to allow you extra time to spend down your remaining funds. So if you have a grace period deadline on March 15, that is the last day you can spend your remaining 2020 funds.
How can I take advantage of the FSA "run-out" period?
If you've been on top of your bookkeeping to keep receipts and invoices for FSA eligible products and services, you're already ahead of the game. The claims process during the "run-out" period is the same as during your plan year, and receipts and invoices should contain the following information. From WageWorks:
"To make sure your claims are processed quickly, please make sure that your receipts and documentation include the following five pieces of information:
- Patient's Name: The name of the person who received the service or for whom the item was purchased for. For retail store purchases, this information may be excluded.
- Provider's Name: The provider that delivered the service or where the item was purchased.
- Date of Service: The date on which services were provided or the item was purchased.
- Type of Service: A detailed description of the service provided or item purchased. A bag tag is sufficient for prescriptions.
- Cost: The amount you paid for the service or product and/or the portion that is not reimbursed through your insurance carrier."
Once you have this information on-hand, you're ready to file your claim! Simply log into your benefits portal and follow the instructions to have your claim processed. Remember, not all claims will be honored and benefits administrators may require additional documentation if a product falls outside of eligibility rules, there aren't enough funds in the account or if additional information is required to reimburse the expense.
Finally, it's important to remember that run-out periods are available as a helping hand to those who may have let claims slide over the course of a plan year. After 2020, who could blame you? But if you want to avoid the year-end scramble to file claims, make a process for filing them during your plan year instead. File claims at the end of each month, or quarterly so you can stay ahead and avoid adding one more thing to your year-end rush.
But first thing's first - check with your HR department or benefits administrator to see if your employer offers a "run-out" period, how long it lasts and what you need to do to be reimbursed for your eligible expenses. Don't leave your hard-earned dollars on the table and make sure you maximize your 2020 tax savings!
A timeline of tax-free health care
Flexible spending accounts (FSAs) and health savings accounts (HSAs) are currently the most popular consumer-directed, tax-free health care accounts in the U.S. today. The term "consumer-directed" refers to insurance plans that pay for common medical expenses like checkups and emergency care, but also contain a separate account to help you further reduce your out-of-pocket health care costs.
Enrolling in an FSA will require research to figure out if it is the best option for your financial bottom line, but like all things on the internet, even long-debunked ideas can persist. Luckily, we've identified the most common FSA myths that you should disregard in your search for the ideal health plan:
- "I will lose any money I don't spend by the end of the year."
While it is true that all flexible spending accounts adhere to the "use-it-or-lost-it" rule that requires all unspent funds to be forfeited to your employer at the end of each plan year, a number of regulations have made this requirement much easier to work around. Employers now have the option to choose one (or neither) of either a $500 rollover or 2.5 month grace period.
The $500 rollover allows FSA users to move up to $500 into the next plan year's allocation, which won't count against the plan year contribution limit. The 2.5 month grace period gives FSA users two and a half months to spend down the remainder of their FSA funds and submit claims. In fact, we started our company to help people avoid forfeiting funds by creating a one-stop-shop for over 4,000 eligible products you can purchase with your FSA funds. So, with a little advanced planning and careful spending, there's a good chance you won't have to waste a cent of your FSA funds each year.
- "The FSA claims process is a hassle"
With the introduction of FSA debit cards, account holders have the ability to pay for qualifying products and services at the point of sale. In the past, FSA users were forced to pay with a different payment method and file a paper claim with their benefits administrator to be reimbursed for their eligible purchase. While it's still important for FSA users to save receipts and invoices for tax purposes in the event documentation is required by the benefits administrator, FSA cards make it easier for account holders to get what they need without tying up their cash waiting for reimbursement. We make sure to accept FSA cards as a method of payment on our site, and most items on our site auto-substantiate, so you can skip the receipt submission process too!
- "I have to pay in before getting my full FSA allocation"
Before each plan year during Open Enrollment, FSA users choose how much money they would like to set aside for the year, and this is taken out, pre-tax, from your paycheck through regular payroll deductions. While that may sound like your FSA funds will accrue over the course of the year, the reality is the full FSA allocation is available from the first day of the plan year. So, you can be confident that the money you set aside will be ready for any medical emergency or qualifying purchase right away.
For everything you need to keep your family healthy year-round, rely on FSAstore.com! We have the web's largest selection of FSA-eligible items to help you maximize the potential of your healthcare benefits.
As an FSA user, you know just how important end of year spending is to maximizing the potential of your account. However, while the "use-it-or-lose-it" rule is still in effect and many account holders must spend their funds by the end of each plan year, there are 2 vital deadline extensions that all FSA users should be mindful of: the $550 rollover and the 2.5 month grace period.
Update for 2021: The FSA rollover has increased to $550
What are the $550 rollover and 2.5 month grace period?
Historically, FSA users would forfeit any unused FSA funds at the end of each plan year thanks to the "use-it-or-lose-it" rule. While this rule is still in place, two important changes have emerged over the past decade to provide a measure of relief to FSA users: the $550 rollover and 2.5 month grace period. FSA plan sponsors can choose to offer ONE of the two rules when administering FSAs, but not both.
This FSA regulation gives account holders the ability to "roll over" up to $550 in to the next plan year's account to prevent a large portion of funds from being forfeited. The FSA plan sponsor can elect to allow less than $500 to be rolled over, but the same rollover limit must apply to all participants under the current FSA plan rules. The $500 rollover does not count toward the following year's maximum election amount ($2,750 for 2021), so account holders could feasibly roll over $500 of last year's funds on top of the full election amount of $2,750 for 2021 which would give them $3,250 available for reimbursement for healthcare expenses that year.
2.5 Month Grace Period
The other option is the 2.5 month grace period. This gives account holders the ability to spend down the remainder of the previous year's FSA funds before March 15 (for FSA plans ending December 31), after which any unspent funds would be forfeited back to one's employer. Unlike the FSA run-out, which can be offered in conjunction with a rollover or grace period and provides up to 3 months after plan year end to spend down remaining funds for expenses incurred during the prior plan year only, the grace period allows users to spend down remaining FSA dollars on new expenses incurred within the new plan year as well.
How do I know if I have the rollover or grace period?
Your end of year options can determine how you will spend your allocation over the course of the year, so it's vital that you know your FSA plan details before setting an election amount for the coming year. Aspiring FSA users should inquire about these regulations during their health benefits Open Enrollment to plan out the optimal healthcare spending for the coming year.
Last but not least, if you're an FSA user and you've never heard of the $500 rollover or grace period, speak with your benefits administrator immediately! FSA plan administrators, whose information can typically be found on the back of an FSA benefits card or by contacting your HR department, can let you know the exact details of your FSA. With March 15 just around the corner, FSA users all over the country could still have money left to spend, so don't let a cent of your money go to waste!
For everything else regarding your FSA, you can rely on FSAstore.com! Shop the web's largest selection of FSA eligible products, browse product/service regulations in our Eligibility List and plan your yearly spending with our handy FSA Calculator!