Grace Period Still a Question for Some FSA Plan Administrators

A recent survey found employers are split down the middle on whether to offer a grace period that would provide Health and Dependent Care Flexible Spending Account (FSA) participants more time to use their elected amounts before the “use it or lose it” rule would apply.

A major employee objection to FSAs has been the difficulty of predicting expenses over a 12-month period. Rather than chance being wrong, many opt not to participate. It is uncertain what impact that IRS Notice 2005-42 will have on participation, by allowing employers to design plans with up to an additional 2 ½ month grace period. In addition, it is also uncertain how many employers will actually adopt a grace period.

FSAs allow employees to contribute pre-tax dollars to an account to pay for qualified medical and dependent care expenses. However, prior regulations required all funds be used by the end of the plan year or else be forfeited to the plan. This often resulted in a year-end “spending binge” to use up the remaining balance that would otherwise be forfeited.

The new ruling reduces the risk of the “use it or lose it” rule by adding up to 2½ months to the end of a plan year for participants to incur expenses. In other words, amounts from one plan year may be used for expenses incurred during the grace period of the following plan year. Any remaining amounts after the grace period are forfeited. Grace periods are not automatic; each employer must choose whether to apply this additional time. If the employer does choose a grace period, it must amend its plan documents prior to the end of the plan year to which the grace period will apply.

A survey, released by Deloitte Center for Health Solutions and the ERISA Industry Committee, found approximately half of U.S. employers are planning to allow the additional 2½-month grace period. The other half are undecided or are not offering the grace period to their participants.

The survey also indicated that only 34 percent plan to extend the grace period to both health care and dependent care FSAs. Respondents gave three primary reasons:
1) dependent care expenses are more predictable; 2) forfeitures are far less frequent for dependent care; 3) the grace period would be difficult to explain for dependent care.

Those employers that are not opting for any grace period gave multiple reasons:
1) balances for two plan years are difficult to track (67 percent); 2) coordinating the grace period with the run-out periods would be a challenge (58 percent); 3) forfeitures are not a significant problem (49 percent); and 4) grace periods are difficult to explain to participants (42 percent).

Over a quarter of those surveyed were still undecided about applying the grace period. Some (43 percent) are waiting for further guidance, others (24 percent) are waiting on other employers’ experiences, and still others (25 percent) are waiting to gauge employee demand.

For more information about the grace period and the questions behind it, please view the News Room article, FSA Grace period provides more time, questions. A review on what is available, along with ability to see what employers and employees can save with these accounts, call 800-779-6384 or visit our website at www.benefitsolved.com to view information available to assist with an FSA Plan. In addition, Infinisource clients will soon receive additional guidance on options for administrating grace periods.

###

News Room sign-up sheet | Archive