“Use or Lose!” – Deciphering the Difference between Carryover Provisions, Grace Periods, and Runoff Periods

When it comes to Section 125 Plans, the term “use or lose” may come to mind. But what does this mean? Will participants really lose all the money they do not use? Under Internal Revenue Code (IRC) Section 125 regulations, if participants do not use their full election amount during the plan year, any remaining funds are forfeited. If your plan offers a carryover provision, grace period, and/or run-off period and your plan year ends December 31st, now might be a good time to remind your employees to use their funds in the allotted timeframe so they don’t lose reimbursements.

Carryover Provision

A carryover provision allows participants to carry over up to $500 of unused Healthcare Flexible Spending Account (HCFSA) contributions to the next plan year. The money may be used to reimburse eligible medical expenses incurred throughout the following plan year.

Grace Period

A grace period allows participants an additional 2 ½ months following the end of your current plan year to incur HCFSA claims and still receive reimbursements from the current plan year balance.

Runoff Period

The runoff period is the amount of time a participant can submit claims and documentation for expenses incurred during the plan year that just ended, and, if applicable, claims incurred during the grace period. The Runoff Period applies to both HCFSA and DCA.

In summary, a carryover provision allows participants to take up to $500 of funds from the previous plan year to the next plan year. A grace period allows participants to incur new claims and get reimbursed with funds from the previous plan year. And, a runoff period gives participants an extra period of time after the plan year to file claims for expenses that were incurred within the previous plan year and applicable grace period. It is important to note, a plan may not offer both a grace period and a carryover provision.

If you would like materials to help explain how each of these works, reach out to your American Fidelity representative. We can provide flyers or a presentation that explain each of these provisions as well as materials to help with the overall understanding of reimbursement accounts. If American Fidelity Assurance Company is your Section 125 provider and you would like to update your Plan Document to include one of these provisions, contact us. If you don’t currently offer Flexible Spending Accounts but are interested, we can help.