A flexible spending account (FSA) grace period gives your FSA participants more time to spend down their FSA balances. In the second post in our FSA flexibility blog series, we break down FSA grace periods.
What is an FSA grace period?
How long can one be?
The IRS allows employers to permit a grace period of up to 2 ½ months. For example, if your FSA’s plan year runs from January 1, 2021 through December 31, 2021, then the maximum allowed grace period would let participants incur FSA eligible expenses through March 15, 2022 for their 2021 plan year.
Who determines the length of the grace period?
The employer determines how long the grace period is (within the IRS’ 2 ½-month limit).
Can an FSA include a carryover and grace period?
No. You can offer either a carryover or grace period, but not both.
The Consolidated Appropriations Act, 2021 provides even more relief (albeit temporarily) for FSA participants. Under the CAA, you are allowed, but not required, to extend your grace period for 12 months after the end of the plan year for plan years ending in 2020 or 2021.
Perks for participants
Since FSAs are governed by the IRS’ use-or-lose rule, your participants forfeit their unused FSA funds at the end of the plan year. A carryover or grace period provides them with peace of mind, either with carryover funds or more time to spend funds. By providing them with more flexibility, your participants might be more likely to participate in your FSA year after year, allowing you and them to save more money.
Check out our first blog post in the series to learn more about FSA carryovers.
The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own counsel.