Two months ago, NueSynergy wrote about when carryover funds are available for new FSA members. Now, we are here to provide a more detailed look into what a carryover is, how it works and any questions you may have.

What it is and how it works

Starting on October 31, 2013, the U.S. Department of Treasury adjusted the “Use It or Lose It” rule, providing employers the option to offer a carryover plan to their employees. This option allows up to $570 of remaining FSA balances at a plan year’s end to carryover for use during the next plan year. This is available with Healthcare and Limited Purpose FSAs only.

Funds carried over into the following plan year will be available on the first day of the year unless enrolled in a Health Savings Account (HSA). If that’s the case, then those funds must be carried over into a Limited Purpose FSA.

Keep in mind, carryover funds are non-transferable. This means that if employees with a carryover are terminated mid-year, funds will be treated as any normal election and will be forfeited if COBRA is not elected.

Questions to consider

What happens if a participant has a carryover balance, but does not re-elect a Healthcare FSA?

Employers can choose to allow participants who do not enroll in the new plan year to either forfeit their previous plan year balance or default their carryover into an FSA for the new plan year.

What is the difference between a Healthcare FSA and a Limited Purpose FSA?

A Limited Purpose FSA can only be used for vision and dental expenses. It is intended to work in conjunction with an HSA. A Healthcare FSA covers all eligible medical expenses.

Is additional time offered to participants following the end of the plan year to incur expenses against the previous plan year?

Yes. This is called the grace period. It allows employees additional time, usually 2.5 months, to use remaining funds. If the carryover option is elected, it will replace the grace period option.

Can employers give participants the option of both a carryover and a grace period?

No. An employer can only provide one option within the same plan year.

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