New Grace Period For Flexible Spending Accounts
 
May 23, 2005
 

Flexible spending account participants will now have more time to use up the amounts in their accounts if the employer elects to implement a new grace period option. The Internal Revenue Service and Treasury Department released a notice on May 18, which allows flexible spending account plan sponsors to amend their plans to add a new grace period. During this grace period, participants may seek reimbursement for eligible health or dependent care expenses that they incur. Plan sponsors may also continue to permit the “run-out” period after the end of the grace period, where participants may submit claims for eligible expenses incurred during the plan year and the grace period. To take advantage of this new grace period for the current plan year, plan sponsors must amend their flexible spending account plans before the end of the current plan year. Here are the rules relating to this new grace period:

• The grace period may be no longer than 2-½ calendar months after the end of the plan year (for example, the grace period for a calendar year flexible spending account plan ends March 15).

• The plan sponsor, if it chooses to add the grace period to the flexible spending account plan, must amend the plan in writing before the end of the plan year.

• The grace period must apply to all plan participants.

• The flexible spending account plan may have a “run-out” period after the grace period ends.

• If the flexible spending account plan includes the grace period, participants may submit claims for eligible expenses incurred during the grace period, but only for expenses relating to that particular account (for example, eligible health care expense incurred during the grace period may only be reimbursed from the health care flexible spending account and not the dependent care flexible spending account).

• Plan sponsors may not cash out any unused balances in the flexible spending accounts during the grace period nor convert the unused amounts to any other benefit.

• Participants must forfeit any unused amounts remaining at the end of the grace period.

For more information, e-mail Nicole Bogard or April Krueger at nicole.bogard@hklaw.com or april.krueger@hklaw.com, respectively, or contact any other of Holland & Knight’s ERISA/Employee Benefit attorneys by calling toll free, 1-888-688-8500.