Flexible Spending Accounts (FSAs) Expiry: What You Need to Know

Flexible Spending Accounts (FSAs) are employer-sponsored benefit programs that allow employees to set aside a portion of their pre-tax earnings to cover qualified healthcare and dependent care expenses. FSAs offer valuable tax advantages, but they also come with specific rules and limitations, including expiration dates for the funds you contribute. Here's what you need to know about FSA expiry:

1. Use-It-or-Lose-It Rule: One of the primary features of FSAs is the "use-it-or-lose-it" rule. Under this rule, any money contributed to your FSA during the plan year that is not spent on eligible expenses is typically forfeited at the end of the plan year.

2. Plan Year: FSAs operate on a plan year, which is determined by your employer. The plan year can align with the calendar year or follow a different schedule. Most employers offer a grace period of up to 2.5 months into the following plan year or allow a carryover of up to $550 of unused funds.

3. Grace Period: Some employers offer a grace period, which extends the deadline for spending FSA funds. During the grace period, you can continue to incur eligible expenses and use the prior year's FSA funds. The grace period can be up to 2.5 months after the end of the plan year.

4. Carryover: In 2020, the IRS introduced a change that allows employers to offer a carryover provision. This allows participants to carry over up to $550 of unused funds from one plan year to the next. However, the employer must choose to adopt this provision, and not all employers offer it.

5. FSA Deadline: To avoid losing your FSA funds, it's crucial to be aware of your plan year end date, grace period, or carryover provisions. You should also understand any deadlines for submitting claims and receipts for reimbursement, as these may be different from the end of the plan year.

6. Eligible Expenses: FSAs can be used for a wide range of eligible expenses, including medical, dental, vision, prescription drugs, and certain dependent care costs. Review your plan documents or speak to your employer's benefits department to understand the specifics of what is covered.

7. Claim Submission: Be sure to submit your claims for reimbursement promptly. Your FSA administrator will have guidelines and deadlines for claim submissions. Proper record-keeping, including receipts and documentation, is important.

8. Planning Expenses: It's helpful to plan your FSA contributions carefully to ensure that you don't contribute more than you expect to spend on eligible expenses during the plan year.

9. Communication: Employers typically provide employees with information about FSA deadlines, grace periods, and carryover provisions. If you're uncertain about the rules, don't hesitate to reach out to your employer's HR department or FSA administrator for clarification.

Understanding the specific rules and deadlines of your FSA is crucial to making the most of this valuable benefit. By staying informed and planning your expenses effectively, you can maximize the tax advantages offered by your FSA while minimizing the risk of losing unspent funds.