Historically, if you participated in a company’s FSA program, you would have to spend all of your FSA funds by year-end -- or forfeit any remaining money.  Thanks to recent changes in FSA legislation, it is now possible for employers to offer a grace period of up to 2-1/2 months after the end of the plan year.  This is good news if you have a significant amount of FSA cash leftover at year-end or if you expect to incur a costly medical expense in the first quarter of next year. Using the Grace Period, you could allocate a portion of last year’s FSA funds to cover it.

How Does the Grace Period Work?

If your company offers a grace period, then any qualified medical expenses incurred in the first 2-1/2 months of the following year are considered as incurred in the previous plan year.  These newly incurred expenses can be paid from any amounts left in the FSA account at the end of that year. 

Are Companies Required to Offer An FSA Grace Period?

The IRS does not require employers to offer a grace period; offering one is strictly up to the discretion of the employer.  You can find out if your employer offers a grace period by reading your company’s Plan Document or SPD.  That’s because in order for employers to be ERISA compliant, they must communicate whether they are offering the extension period – or not -- in these documents.

What If You Must Spend Your FSA Money by Year End?

“Then, take advantage of the list of eligible health care costs deemed as qualified expenses by the IRS,” notes Denise Angleman, Senior Vice President of NIA’s Employee Benefits Division.  “The IRS updates its list of eligible expenses frequently; therefore, you should periodically check its Web site at www.irs.gov to see what has been added.  You may find that you are spending your taxable earnings on items that could have been paid for with funds from your FSA account.  However, if you plan in 2007 to switch to a high deductible health plan with an HSA, you should know that the IRS precludes you and your employer from making contributions to your HSA during the FSA grace period. ”

Examples of FSA – Eligible Expenses

While most FSA participants know that FSA funds cover general expenses like medical plan deductibles and co-payments and prescription and over-the-counter drugs, here are several items that you might not have known qualify for FSA reimbursement:

• Private duty nursing services
• Speech Therapy
• Weight-loss programs (medically necessary)
• Back support devices
• Special mattresses (medically necessary)
• Orthopedic shoes
• Acupuncture (when treating a medical condition)
• Reading therapy for dyslexic child
• Braille books.

Happy spending!