Rollover: A rollover allows employees to carry over unused FSA funds to the new plan year. The employer decides how much can be rolled over per plan year (up to the IRS-regulated maximum of $550). This does not affect the maximum election amount allowed by the IRS. An employee can elect the full amount and still have unused dollars rolled over with no penalty.
Grace Period: A grace period is a 2.5-month period following the end of a plan year. During this period, an employee may pay for new expenses with funds remaining in the plan year that has just ended, using an Ameriflex card or by submitting a manual claim. Per IRS requirements, the Grace Period must be two full months and 15 days.
Run-Out Period: The run-out period is typically a 90-day timeframe following the end of a plan year. During the run-out period, employees may submit manual claims for any expenses incurred within the plan year that has just ended in order for prior-year claims to be reimbursed with any funds remaining in that plan year. The run-out period is standard and will be in place regardless of any other options chosen.
How These Options Work
Run-Out Period Only: Once the plan year ends, on the first day of the new plan year, the Ameriflex card will begin to pull FSA funds from the new plan year. Any prior plan year claims must be submitted via manual claim. Although the run-out period typically lasts for 90 days (three months), it can be as short as one month. The period cannot be less than one month, as participants must have a reasonable amount of time to submit claims following the last day of the plan year or following their termination of employment.
Grace Period: If a plan year ends on December 31, 2020, then from January 1, 2021 to March 15, 2021, the Ameriflex card will continue to pay for any new transactions with funds from the prior plan year. From March 16, 2021 to March 31, 2021, the regular run-out period rules would still apply, but employees can submit new claims for services rendered between January 1, 2020 and March 15, 2021.
Rollover: If a plan year ends on December, 31, 2020, then on January 1, 2021, any remaining prior plan year FSA funds (up to $550) are moved into a rollover account (ROL or RO2, depending on the plan year). As with the run-out period, the Ameriflex card will begin to pull from the new plan year FSA funds on January 1, 2021. Manual claims are still required for prior plan year expenses, and employees still have 90 days to submit those claims. Any prior plan year claims will first be paid from the prior plan year FSA funds (if funds remain) and then from the funds in the ROL account. If an employee should deplete their new plan year FSA account within the run-out period, the Ameriflex card will begin to pull from the ROL account for new expenses. If this occurs, prior plan year claims and new plan year FSA transactions will be processed on a ‘first come’ basis from the ROL account funds. Once the run-out period has ended, any funds remaining in the ROL account will be moved into the FSA account.
Scenario 1 - John is enrolled in an FSA that runs from January 1, 2020 to December 31, 2020. He has $700 left in his FSA on December 31, 2020 and he has elected $1,000 as his 2021 FSA amount. On January 1, 2021, he will have an ROL account with $500, and his 2020 FSA will still show his remaining $200. John receives a bill for $400 in January for services from December. He submits this as a manual claim. Ameriflex approves the claim with the first $200 coming from the 2020 FSA and the remaining $200 pulling from the ROL account, leaving him with $300 in his ROL. If no further claims are submitted by March 31, 2021, then on April 1, 2021 when the run-out period ends, the $300 will move forward to his 2021 FSA, giving him a balance of $1,300 for 2021.
Scenario 2 - Jane is also enrolled in an FSA that runs from January 1, 2020 to December 31, 2020, and she also has $700 remaining. However, she has only elected $200 in her new plan year FSA. On January 1, 2021, she will have an ROL account with $500, and her 2020 FSA will still show her remaining $200. Jane receives a bill for $130 in January for services from December. She submits this as a manual claim. Ameriflex approves the claim with the full amount coming from the 2020 FSA, leaving $70. In February she purchases a new pair of eyeglasses that cost $400. She uses her Ameriflex card. The expense is paid with the first $200 coming from her new plan year FSA and the remainder pulling from her ROL account, leaving $300. On April 1, 2021, when the run-out period ends, the remaining $300 will move forward to her 2021 FSA, giving her a balance of $300 for 2021.
Scenario 3 – Jack is enrolled in an FSA that runs from January 1, 2020 to December 31, 2020 that has $500 remaining, but he did not elect an FSA for the new plan year. On January 1, 2021, he will have an ROL account with $500, and his 2020 FSA will show a $0 balance. On April 1, 2021 (provided that he has not used any of the ROL funds), the $500 balance of the ROL account will move forward to his 2021 FSA, giving him a balance of $500 for 2021. If Jack’s employment were to be terminated in 2021, he would not be eligible to continue using the rollover funds via COBRA.
How This Will Help
Since a plan administrator must choose between the Grace Period and the Rollover Period, it is helpful to remember the following:
The grace period provides a longer window for employees to spend down their remaining prior plan year funds, but the rollover period ensures that up to $550 will remain available rather than being forfeited. You should review your balance reports to determine which option will be the best for your employees. The forfeiture amounts should give you a good idea of the remaining balance amounts your employees tend to have at the end of each year.