Flexible Spending Accounts (FSAs) – if you signed up for one, chances are you’ve heard a few terms that you may or may not be familiar with. FSAs are great tools for helping you save money on taxes while also putting money aside for out-of-pocket healthcare expenses. It’s important to fully understand phrases like “use it or lose it”, “carryover”, “grace period” and “run out”.
This is very straightforward and is exactly what it sounds like. If you don’t spend of all your election amount by the end of the plan year, you lose the unspent balance. That’s why it is important for you to estimate your (and your family’s) expenses for the year and make your election equal that estimate – up to the annual limit.
This is especially important near the end of the year, since you’ll need to figure out how to use all of your benefit dollars.
Use it or lose it applies to Health FSAs, Limited Purpose FSAs (LPFSAs), and Dependent Care FSAs.
If you’re wondering how to estimate FSA elections, read How Much Should I Put in My FSA?
What is carryover?
Carryover allows FSA participants to “carry over” a maximum of $500 in unspent FSA funds to the following year. If you elected $2,600, but only spent $2,300, you could carry over the remaining $300 to use next year. Keep in mind, if you spent $2,000, you could still carry over $500, but you would lose the remaining $100.
Plans vary by employer and your plan’s carryover maximum may be lower than $500.
Carryover can be part of a Health FSA and LPFSA plan; if you have a Dependent Care FSA, carryover does not apply.
Grace period is an extra amount of time after the end of the plan year that allows you to use any unspent money in your FSA (health or LPFSA). The grace period can be up to a maximum of two and half months, but may be shorter depending on plan setup.
For instance, if your plan runs from January 1, 2019 through December 31, 2019, you would have until March 15, 2020, to use all of your FSA funds. Any unused FSA balance for the 2019 plan year would be lost after the grace period ends.
Run out is different than a grace period, where you have an extended amount of time to spend your money. During run out, you have a predetermined period in which you can file claims for the previous year. Run out periods provide a little extra time to get reimbursed. This can be applied to a Health FSA, LPFSA, and Dependent Care FSA.
For example, if your run out period lasts until March 31, you could file claims up to that deadline for expenses that happened before December 31. Consider this: if you visited the dentist on November 1, but you had yet to file a claim, you could still file before March 31.
Keep in mind, the run out period varies by plan.
Be sure to contact your benefits administrator or HR department, or refer to your summary plan description to get all the details for your FSA plan.