125 Cafeteria Plans – Carryover vs. Grace Period

You’ve probably heard the terms “carryover” and “grace period” when it comes to the 125 Cafeteria Flexible Spending Account Plan designs, but what do they mean? While both terms relate to the funds that remain at the end of the plan year, they do different things.

CARRYOVER – funds in an FSA can be carried over from one calendar year to the next. The current amount allowed by the IRS is $500. Any amount over the carried over $500 at the end of the year is forfeited. This plan design can only be used for the medical FSA.

GRACE PERIOD – the time that funds in an FSA can be used is extended from the 12-month actual plan year to 14 months and 15 days. The grace period gives the employee an additional 2 months and 15 days to spend what is left in their FSA from the previous plan year. Any amount left at the end of the extra 2 months and 15 days will be forfeited. This plan design can be used either with the medical Flexible Spending Account (FSA) or the Dependent Care Assistance Program (DCAP).

Either plan design eases the year-end “spending rush,” gives employees more time to pay for their medical expenses, and mitigates the difficulty of predicting their future medical expenses.

Currently, many employers use the “use-it-or-lose-it” method. In this situation, if at the end of the year there are funds still available in the employee’s FSA, those will be forfeited. Many employees may choose not to participate because they cannot predict their future health care spending for that plan year and don’t want to lose their hard-earned money.

At the end of the day, BASE® is here to save employees and employers as much valuable tax savings as they can. Once the employer chooses, the decision adds an extra benefit to their benefits package. By adding one of these plan designs to their already great benefits package, more employees begin to participate, which leads to the employer saving even more valuable tax dollars.

Both options will provide the employer (and their employees) peace of mind knowing that their FSA funds will be able to go farther than before. For more information, please call BASE® at 1-888-386-9680.