| |
| |
| |
| Posted on: Friday, May 27, 2005 |
| |
On May 18, 2005 the Treasury Department announced a revision to the Healthcare and Dependent Care Flexible Spending Account (FSA) ’use it or lose it rule’ giving employer Plan Sponsors the option of allowing for a 2 ½ month grace period immediately following the plan year, during which participants can continue to incur eligible expenses and be reimbursed from remaining dollars in their accounts.
In recent years, Congress has debated whether or not the ’use it or lose it rule’ should be relaxed, perhaps even allowing a portion of contributions to rollover into following plan years. While the rollover option has been repeatedly defeated, this recent announcement is considered a compromise. The grace period can be up to 2 ½ months, and allows additional qualified benefit expenses incurred by participants during the grace period to be paid out of dollars remaining from the previous plan year. The contributions required via payroll deduction shall still be based on a pro-rata per pay period basis over 12-months and remaining funds at the end of the grace period must still be forfeited.
Increase FSA Plan Participation?
Through the addition of a grace period, the severity of the ’use it or lose it rule’ is lessened and may help encourage new participation in FSAs. Although actual forfeitures of unused FSA dollars by participants has historically been minimal, the threat of loss may intimidate some employees from participating in FSA Plans. The revised rule may be a way for employers to encourage new participation by employees that had previously been intimidated by the
"’use it or loose it" rule.
Implementation Considerations
Plan Sponsors have the option of implementing this grace period during their current plan year, future plan years, or not at all. If a plan sponsor elects to implement this option during their current plan year, the following administrative issues should be considered:
• Overlapping Claims Processing - The Claims Administrator must be
capable of processing claims during the time the past plan year’s grace
period overlaps the new plan year. Most administrators likely already
handle this sort of processing for Health Reimbursement Accounts
(HRAs), but it is important to verify they’re prepared to do so for
Healthcare and Dependent Care FSA’s. Also, if a debit card is used,
can the administrator adjust it to recognize and process the claims
appropriately?
• Increased Administration Costs - While likely minimal, there may be
additional administrative costs due to extending the plan year.
How to Add a Grace Period to an Existing Plan
While some plan sponsors may choose to wait until the next plan year open enrollment, the grace period can be implemented for the current plan year if the Plan Sponsor so chooses through an amendment to the Plan Document. The changes should be clearly communicated to all current plan participants (this rule change does not permit a mid-year special enrollment event for new participants to elect to participate). And as stated above, it is important to verify that the Claims Administrator is able to handle the claim overlap created by a grace period.
Conclusion
This is good news to plan sponsors and participants alike as the true value of a grace period lies in its potential to help employers attract new participation in Flexible Spending Account Plans. Should you choose to implement this option for this year’s current FSA plans, please contact the DGCO team. We’re prepared to assist you right away.
Should you have any additional employee benefit questions or would like to discuss this material in detail, please don’t hesitate to call the Denman Team.
|
| |
 |
| |
| Information
on this site is for general information only. It does not constitute
nor should it be construed as legal, financial, health or any
other kind of professional advice. This site makes no claims,
promises or guarantees about the accuracy, completeness, or
adequacy of the information contained in or linked to this website. |
| |
| |
|
| |
| |
|
