Understanding the differences between Runout, Grace Period, and Rollover

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Some flexible spending account (FSA) participants have the unfortunate experience of forfeiting, or losing, unused funds from their Health Care FSA and/or Dependent Care FSA because they don’t understand their plan provisions. It is important for everyone involved in FSAs to understand which plan provisions provide time to file claims after the end of the plan year, such as runout, and when the plan includes optional features that provide more time to incur expenses, such as grace period and rollover.

  • Health Care FSA: Runout, grace period, and rollover are permitted by the IRS for Health Care FSAs in order for participants to minimize their FSA forfeitures. A Health Care FSA cannot offer both grace period and rollover during the same plan year.
  • Dependent Care FSA: Runout and grace period are permitted by the IRS for Dependent Care FSAs in order for participants to minimize their FSA forfeitures.

Employers can generally choose the features offered on their Health Care FSA and Dependent Care FSA independently. For example: employers can offer rollover on the Health Care FSA and grace period on the Dependent Care FSA. Please review options offered by your third party administrator for any restrictions.

In order for a plan to offer these optional provisions or features, the Employer or Plan Sponsor must include them in their Plan Document and Summary Plan Description (SPD).

Runout is an administrative period of time following the end of the plan year that allows a participant extra time to submit eligible claims incurred during the plan year. Runout is available on both Health Care FSAs and Dependent Care FSAs. Most employers will include a period of time to file claims as a standard part of their FSAs.

Example: Barry is enrolled on his employer’s 2020 calendar year Health Care FSA with a 3-month runout period. He does not enroll on the 2021 plan. On March 15, 2021, Barry submits two claims:

  • Claim 1: Claim was incurred on December 2, 2020. This claim can be reimbursed because the claim was incurred during the 2020 plan year and submitted during the 3-month runout.
  • Claim 2: Claim was incurred on January 13, 2021. This claim cannot be reimbursed because the claim was incurred after the end of the 2020 plan year.

Grace Period is an optional provision that employers can add to their Health Care FSA and/or Dependent Care FSA that provides an additional period of time, up to 2 months and 15 days after the end of a plan year that allows participants to incur claims into the new plan year. FSA participants can incur new expenses during the 2 month and 15 day grace period and use the remaining funds from their prior plan year to reimburse the expense first before reimbursing from the current plan year. Claims for a grace period expense must be submitted within the runout period for the prior plan year, otherwise they can only be reimbursed out of the current plan year’s funds.

In order for a participant to be able to submit grace period claims, the employer must have adopted this provision for their plan. This would be documented in their Plan Document and SPD. For Employee Benefits Corporation clients and participants you will find this information in the My Company Plan (MCP).

As long as a participant is enrolled in the FSA on the last day of the plan year and has funds remaining in the FSA, the grace period will be triggered. Individuals who have paid their COBRA premium for the last month of the plan year will be considered eligible for the grace period.

Example: Barry is enrolled on his employer’s 2020 calendar year Health Care FSA with grace period. He also enrolled in the 2021 Plan.

  • Example 1: Claim was incurred on March 11, 2021 and submitted on March 15, 2021. This claim can be reimbursed from the unused 2020 account balance as it was incurred during the grace period. If the unused balance from 2020 is less than the eligible expense, a portion of the claim will be reimbursed from the new 2021 plan year balance.
  • Example 2: Claim was incurred on December 28, 2020 and submitted on March 18, 2021. This claim can be reimbursed from any remaining unused 2020 account balance as it was incurred during the plan year and submitted during the runout period. Grace period has no impact on this claim because the expense was incurred after March 15, 2021
  • Example 3: Claim was incurred on March 16, 2021 and submitted on March 18, 2021. This claim can be reimbursed ONLY from the 2021 plan year. Unused 2020 funds cannot be used as the claim was incurred after the end of the grace period.

Participants should be sure to review their SPDs regarding the grace period to see if their third party administrator has specific rules for processing of claims based on timing of when they are submitted. In general, it is best to submit any claims incurred in the prior plan year (2020 from the example above) PRIOR to submitting any claims incurred in the new plan year (2021 from the example above). This way, participants are sure to utilize their 2020 balance on claims that can only be paid from that plan year balance, rather than claims that can be applied either to the 2020 balance or the 2021 balance.

Rollover (or carry over) is an optional provision that employers can add to their Health Care FSA to allow up to a specified dollar amount to roll from one plan year to the next. This provision is not available for Dependent Care FSA.  For plan years starting on or after January 1, 2020, the maximum a plan can allow to rollover is $550 (however, the Plan can specify a lower limit). This amount may be indexed for inflation in future years in $10 increments. FSA participants can use any funds that rollover at any time during the new plan year. In addition, if the FSA funds remain unused, they will continue to roll from one year to the next.

If an employer adopts the Health Care FSA rollover, there are additional features that employers can utilize with their plan:

  • New year election requirement: Requiring that participants make a Health Care FSA election for the new plan year in order to receive the rollover.
  • Applying a minimum balance: Only allowing the rollover of funds for accounts in which the unused balance meets or exceeds a defined minimum dollar amount.
  • Year-to-year account settings (if an employer offers both a standard health FSA and limited health FSA): Employers can specify where rollover funds are directed (to the standard or limited health FSA) based on defined criteria.

These additional features helps with HSA compatibility, helps avoid the rollover continuing endless for terminated employees, and/or avoids a small dollar amount rolling forward from one year to the next.  Employee Benefits Corporation has all of these options available. However, employers should check with their third party administrator to see which of these options may be available.

In order for a participant to benefit from rollover, the employer must have adopted this provision for their plan. This would be documented in their MCP and SPD.

Example: Barry is enrolled on his employer’s 2020 calendar year Health Care FSA with rollover. He also enrolled in the 2021 Plan. His Health Care FSA allows rollover for all participants, regardless of account balance and new plan year elections. His plan also includes a 3 month runout period.

  • Example 1: Claim was incurred on March 11, 2021 and submitted on March 15, 2021. This claim can be reimbursed from the 2021 account balance, which includes unused 2020 funds which have rolled over at the end of 2020.
  • Example 2: Claim was incurred on December 28, 2020 and submitted on March 18, 2021. This claim can be reimbursed from any remaining unused 2020 account balance as it was incurred during the plan year and submitted during the runout period. The amount of funds available in the 2021 plan year may be reduced if this runout claim reduces the amount of funds that would have been permitted for rollover.

Participants should be sure to review their SPDs regarding rollover to see if their administrator has specific rules for processing of claims based on timing of when they are submitted. In general, it is best to submit any claims incurred in the prior plan year (2020 from the example above) PRIOR to submitting any claims incurred in the new plan year (2021 from the example above). This way, participants are sure to utilize their 2020 balance on claims that can only be paid from that plan year balance (during runout), with minimal impact to the amount of funds that can be rolled over.

Note: the maximum rollover amount previously was limited to $500. In May 2020, the IRS issued Notice 2020-33, which indexes the rollover limit annually. Read more here.


HSA Eligibility

As employers consider offering grace period or rollover on their Health Care FSA, they should be aware that these may delay HSA eligibility for employees who participate in the plan. Read some of our earlier posts for more information on this:

Health Care FSA Grace Period’s Impact on HSA Eligibility

Health Care FSA Rollover’s Impact on HSA Eligibility


COVID-19 Relief Impacting Runout, Grace Periods, and Rollover

Various regulatory relief has had impact on runout, grace periods, and rollover. This relief temporarily may change the standard plan rules as outlined above.

  • Runout Periods: In April 2020, the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) issued a rule that “paused” some deadlines. Included in this was the deadline to submit claims for group health plans. Due to this rule, Health Care FSA runout period deadlines have been temporarily extended. Read more here. This rule does not apply to Dependent Care FSA and is not required of non-ERISA employers.
  • Grace Period: The maximum grace period allowed under a plan is normally 2 months and 15 days. IRS Notice 2020-29 allowed employers with plan years or grace periods ending in 2020 to offer an extended grace period. Grace periods can be extended through 12/31/2020, provided an employer amends their plans to permit this. This is permitted for both Health Care FSA and Dependent Care FSA. Read more here.
  • Grace Period and Rollover: With IRS Notice 2020-29 and the extended grace period allowance, plans are also permitted to temporarily offer both grace period and rollover on their Health Care FSA. Read more here.

 

Categories: Benefits in General, Health Care Reform, Compliance | Tags: Health Care FSA , Dependent Care FSA , Runout , Grace Period , Rollover , HSA eligibility , COVID Relief , 2020-29 | Return

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