The Health Care or Dependent Care Flexible Spending Arrangement (FSA) is commonly referred to as a “use it or lose it plan.”  This means the amount of money in the plan must be used up by the end of the year or you forfeit the balance.  Your employer is not able to pay you the balance of the account.

The FSA annual grace period (AGP)

But in 2005, the IRS offered a 2 ½ month grace period (known as the “annual grace period” (AGP)) that employers, if they chose to do so, can use in their plans.  So, it’s important to know if your employer has decided to use the 2 ½ month grace period, you still have time to use your 2009 health care savings.

Don’t rely on the FSA grace period

While the grace period can be a great benefit, it’s important that you don’t become reliant on the grace period and begin to see it as the actual due date for spending.  This could cause problems when trying to use up all of the current year’s balance by the end of the year.  In other words, if you rely on this year’s grace period to spend last year’s savings, you now have less time in the year to spend current year savings and may end up needing to use the grace period again (using it as the actual due date).

At the same time, the grace period has been provided as a nice benefit to the FSA’s.  Sometimes it is difficult to use up all of the funds by the end of the year.  A “use it, or lose it” strategy can be somewhat harsh, especially if you’ve contributed a lot of money to your FSA.  Perhaps you over contributed in one year.  The grace period simply offers you some extra time to spend your FSA balance.

The FSA run-out date

You need to also keep in mind another important date associated with the FSA.  It is called the “Run-Out date.”  It is a date that marks the cut off for filing claims for the previous year.  In other words, all claims have to be submitted by the run-out date.  If you do not submit a claim before the run-out date, you will forfeit any remaining balance in the account.

Check to see if your employer offers the FSA grace period

• Check to see if your employer offers the annual grace period by either contacting your HR department or checking on the website of your company’s plan administrator.
• Check to see what types of accounts are offered as a part of the grace period.  Some employers may limit the plan types.
• Fill free to call or go and visit with your HR department to understand the specific rules your employer has put into place.  While checking benefits online is a convenient option, you don’t want to misinterpret any rules.  Again, the idea is for you to avoid losing any money!

Friendly reminders for general FSA tracking

Make sure you keep all of your receipts

There are several times throughout the year I’m asked to submit a receipt to substantiate the purchase.  I typically keep a separate folder in my financial file for such expenses.

Respond promptly for any requests to substantiate spending

When asked to substantiate a purchase, make sure you do so right away.  Without prompt substantiation some accounts can be frozen.

File claims promptly

How will you pay for medical expenses if you use an FSA?  With an FSA the money is taken from your paycheck as a before tax benefit.  So, how do you purchase or pay for medical expenses if your employer doesn’t offer an FSA card to withdraw from this account?

To be honest, it’s difficult for most people to use cash out of their monthly budget to pay in advance for the expense before it can be reimbursed.  Therefore, many people may use a credit card and then file a claim.  Once the payment is received the balance on the credit card is paid.  In this case it is important to promptly file claims for reimbursement because in some cases it could take a few weeks to receive your check.

Review both your current year and previous years’ accounts

It’s important to review balances and transactions for both current year and previous year if you’re in-between.  As the new year begins, any spending will typically come from your previous year if you have a balance.  Once the balance is used, spending will withdraw from your current year account.

It’s a good idea to keep an eye on spending, especially if it falls in the grace period.  You’ll also want to make sure you’re submitting claims promptly.

Final thoughts

The best way to use an FSA account is with some good estimating of expenses.  You really don’t have to be concerned with the grace period or run-out date if you’ve estimated accurately.  You can only provide accurate estimates if you’re tracking actual health care costs and staying aware of what expenses might be on the horizon.  But keep in mind, it’s and estimate so it’s not perfect.  The ideal situation is to either run out of funds right at the end of the year (a little bit early), or be in a situation to use up your funds within a 1 month grace period.

What do you think about the annual grace period and run-out date offered by some employers?

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• Health Care Flexible Spending Account – A Good Benefit
• FSA Balance: How To Spend It